Charge of Income Tax for 1987–88

Orders of the Day — Finance Bill – in the House of Commons at 3:47 pm on 29th April 1987.

Alert me about debates like this

Question proposed, That the clause stand part of the Bill.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

On a point of order, Mr. Deputy Speaker. It might be of assistance to you and to the Committee, and out of courtesy to the Chancellor of the Exchequer, if I say on behalf of my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) that he has been unavoidably detained. He had intended to be present to hear the Chancellor's remarks and to make his contribution to the debate. He will join the Committee as soon as he is able to do so. In the meantime, I hope that the Committee will accept his apology.

4 pm

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

I am sure that the Committee is grateful to the hon. Member for Dagenham (Mr. Gould) for that explanation.

It is wholly appropriate that we should start the Committee stage of this year's Finance Bill with a clause that goes to the heart of the difference between the parties. I might add that before the Budget I was urged by the Opposition not to cut income tax because the polls showed that nobody wanted lower taxes, and that after the Budget they accused me of indulging in a pre-election bribe. Their concept of an unpopular bribe certainly shows the total confusion of the Labour party, which manoeuvres like squid lost in their own ink.

If the proposal that is before the Committee today is unpopular, I can only say that the Government have consistently shown themselves prepared to take whatever measures are necessary in the interests of the British economy, however unpopular they may be at the time. If, on the other hand, it is popular, I can live with that.

By last year we had reduced the basic rate of income tax—which is the marginal rate of tax for 94 per cent. of all personal taxpayers and 90 per cent. of unincorporated businesses and the self-employed—from the 33 per cent. we inherited from Labour to 29 per cent. The question before the Committee today is whether it should be further reduced to 27 per cent. It would then be within two points of the objective set by my predecessor in 1979 of a basic rate of no more than 25p in the pound, an objective which, given the continuation of present policies, it should not take too long to achieve—income tax down from a third to a quarter.

We on this side of the Committee are in no doubt: the basic rate of tax should now come down to 27 per cent. The Labour party, the Liberal party and the SDP are equally adamant that income tax should not be reduced and are committed to voting against it. The difference could not be plainer, nor is it any accident, for the Conservative party is the only party committed to reducing the burden of taxation as and when it is prudent to do so—that is precisely what we have done—while the Opposition parties are in the business of increasing the burden of taxation, as every Labour Government there has ever been have clearly demonstrated.

It is true that when we first took office in 1979 we inherited a massive and unsustainable level of public borrowing which had to be brought under control if there was to be any prospect of bringing down inflation, to which we were committed. This initially involved, as we clearly explained at the time, an increase in the burden of taxation. But that phase was already over by the time we secured the overwhelming endorsement of the British people in the general election of 1983, and since then the path of taxation has been steadily downward.

The basic rate of tax this year will be 6p in the pound lower than the rate that we inherited from Labour, the lowest it has been since before the war. At the same time, personal allowances are now 22 per cent. higher in real terms than in 1978–79 and the married man's allowance is at its highest level since the war. As a result, 1·4 million people have been taken out of income tax altogether, and tax thresholds in the United Kingdom are now around the international average. The overall burden of income tax is now some £12 billion lower than it would have been if we had kept Labour's tax regime and adjusted it for inflation—something which the Labour Government were not able to do in a number of years during the time they were in office.

The benefits of these tax reductions have been felt at all levels of income. The percentage of earnings taken in income tax and national insurance contributions combined is lower at all levels than if we had kept the Labour regime and indexed it. And real take-home pay—which also, of course, takes account of the effect of changes in indirect taxation—is appreciably higher at all income levels. This is in stark contrast to Labour's record in office. Single people at all levels were worse off by 1978–79 than at the start of Labour's period in office. Under this Government their real take-home pay is up by a fifth or more.

Take the married man on average earnings. Those without children were also worse off in 1978–79 than in 1973–74. Those with children did better, it is true. I shall quote the precise figures, because it is important that the Committee fully appreciate those cases where the Labour Government actually presided over an increase in living standards. The married man on average earnings, with two children, saw his real take-home pay go up by all of a half of 1 per cent. under Labour. That was all that the Labour Government achieved. Under this Government, it is up by more than 21 per cent.

I should like to take just one more specific example, because it is of some topical interest and concerns a group whom the Opposition like to pretend have been victimised by this Government. After the pay award announced last week, a typical nurse will have seen her real take-home pay rise by no less than 42·4 per cent. since 1978–79. If she is married to a typical teacher, their combined take-home pay will also have risen by more than 40 per cent., whereas under Labour it rose by a mere 4 per cent.

The effect of this year's Budget alone is to increase the take-home pay of a married man on average earnings by almost £4 a week—quite apart from any further benefit that he may secure from the reduction in mortgage rates that comes into effect later this week.

Photo of Mr Neil Hamilton Mr Neil Hamilton , Tatton

The hon. Member for Dagenham (Mr. Gould) began with an apology for the absence from the debate of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), who is still busying himself with his pudding. The hon Gentleman said nothing about the absence of any Labour Back Benchers. As this debate was trailed as their great opportunity to rant and rage against the cuts in income tax, does it not rather smack of bogus indignation that Labour cannot raise one Back-Bench Member to come to the debate?

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

My hon. Friend is absolutely right. The Committee can observe that there is not one Labour Back Bencher in his place, with the exception of one PPS. The British people know the truth of what I have been saying. They know perfectly well how much better off they are than they were under Labour. That is why they will not be taken in for one moment by the desperate black propaganda launched by the Labour party this week.

Talking of that, I have to thank the Leader of the Opposition for the letter that he sent me, which I received today. It was addressed very properly to Mr. N. Lawson, 11 Downing street, London SW1. It began "Dear Supporter" and went on to say that Labour was hard up and to ask for money. If the Labour party wants to save money, it can cease writing letters to Downing street for a start. I hope that the hon. Member for Dagenham will pay attention, because the letter went on to say: we will be fighting on our record. While others will try the usual tactic of smear and half-truth, of mud slinging and personality politics, we will go with our record and our plans. When the hon. Gentleman addresses the Committee, we all expect that he will obey his leader's injunction and come forward with Labour's record and Labour's plans, and will not come forward with any of the smears and half truths that we heard yesterday. We had all that business of the secret manifesto in 1983. It was codswallop then and it is codswallop now. It was totally ignored then and it will be totally ignored now. The British people know that it is the Labour party, with its massive public expenditure to finance, that will increase the burden of taxation again if it is given the chance. They know that, to pay for Labour's £34 billion public spending programme—an extra £34 billion over and above the levels in the Government's White Paper — would require either a doubling of the basic rate of income tax or a more than trebling of the standard rate of VAT.

My right hon. Friend the Prime Minister made it clear as far back as 1984 that we have no intention of extending VAT to food. Beyond that, the incidence of taxation has to be determined in the light of the budgetary needs at the time, and no responsible Government could conceivably take any other position. What is abundantly clear is that it is the Labour party that is in the business of putting taxes up, and the Conservative party that is in business of bringing taxes down, and no amount of scaremongering can obscure that basic fact. As this year's Budget Red Book clearly shows—I refer the Committee to table 2.6—the prospects on the basis of present policies are of a steady further reduction in taxation in the years ahead.

The gulf between the parties on the issue of tax is, in part, a profound difference of political philosophy. We believe that what people earn and save belong to them, and that the state should take from them only what is necessary to discharge the functions that only the state can perform, leaving people free to make their own choices and to pursue their own destiny. The Opposition parties believe that all resources belong to the State, that all important decisions should be taken by the state, and that people should he "given"—that is the word they use—whatever pocket money is needed to keep them quiet.

The gulf between the parties on tax is also at the heart of the difference between the two sides of the Committee over the conduct of economic policy. The Opposition start from the proposition that the cure for any economic problem lies in state intervention, which inevitably implies ever-increasing state spending and ever-increasing taxation to pay for that spending.

The policy of the Government is clear, and distinct. As the dismal experience of the 1970s demonstrates beyond any reasonable doubt, the crucial role of fiscal and monetary policy must be to control and conquer inflation. Within that framework, improved economic performance depends on the success of individual enterprise. That requires the Government resolutely to pursue a whole range of policies designed to remove the impediments to enterprise—through deregulation, through privatisation and through reducing the burden of taxation. This prescription is now accepted throughout the world. All major countries have now embarked on policies of deregulation. Most have embarked on programmes of privatisation, openly acknowledging the lead given by the United Kingdom.

As for the burden of taxation, all the other members of the Group of Five have either cut their income tax rates or have announced plans to do so — so has Sweden, which has traditionally been a high tax country, and so have Australia and New Zealand. It is a pity that the hon. Member for Dagenham has not kept up with his compatriots, because the Labour Government in New Zealand are following the same economic policy as the British Government and are a great deal more enlightened than he is. Among the developing countries, India is reducing taxation. The last three of those countries have Socialist Governments. On this, as on so many issues, it is the Opposition parties that are out of step and out of touch. Everyone else knows that the only route to higher living standards and more jobs is through a more dynamic economy, and that the only route to a more dynamic economy is through lower tax rates. It is no accident that the two most successful economies in the Group of Five, and the two with the lowest levels of unemployment, the United States and Japan, are the two with the lowest burden of public spending and taxation.

Moreover, the dynamic effect of reductions in tax rates can often mean not lower but higher revenues, thus leading to the scope for still further reductions in taxation. For example, despite the reductions that we have made, inheritance tax is expected this year to yield almost 50 per cent. more in real terms than capital transfer tax did in 1978–79. The yield of capital gains tax is forecast to he 80 per cent. higher in real terms, and stamp duty is up by 140 per cent. As for income tax, the higher rates applying in 1987–88 are, of course, much lower than the absurd penal rates that Labour enforced, but they are expected to yield 90 per cent. more in real terms, and the top 5 per cent. of taxpayers now contribute 28 per cent. of income tax, compared to 24 per cent. in Labour's last year. The greatly increased yield of corporation tax, reflecting greatly increased company profitability, is clearly connected with the reform of corporate taxation which I introduced in 1984, which brought the rate of tax on company profits in this country to the lowest in the industrialised world.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham 4:15 pm, 29th April 1987

Is the right hon. Gentleman aware that a forthcoming article in Fiscal Studies will show that, contrary to his assertion that the 1984 changes in corporate taxation would be revenue neutral, those changes have turned out to produce £1 billion more in revenue than the previous regime would have done in these circumstances?

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

I shall, of course, look at that article and have it properly evaluated. The increase in the yield of corporation tax is a result of the enormous increase in profitability that has occurred, in part because of the dynamic effects of the change in the corporation tax regime.

There is, as I have said, a profound difference between the two sides of the Committee over economic policy, of which tax policy is an integral part. The policies that we have been pursuing have been abundantly vindicated by the results that they have brought. It is no accident that, this year, I have been able to reduce taxes by £2½ billion and to increase public spending on priority areas by £44¾billion, while reducing public borrowing below its previously planned level by some £3 billion. For the Opposition to claim that they would have used the money differently is totally irrelevant, because with their policies it would never have been there in the first place.

As a result of our policies, the economy today is sounder than it has been at any time since the war—a fact that is increasingly recognised throughout the world. Of course, there is always scope for further improvement—that has always been so and will always be so in every country.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

My right hon. Friend was dealing with public spending and the economy's ability after five or six years of consecutive economic growth to afford increased public spending. Does he take account of the strong case, which many of us discover in our constituencies, for allowing pensioners to share in the fruits of this economic growth?

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

I am glad to say that pensioners have fully shared in the fruits of the economic growth. Over the period in which we have been in office, pensioners' incomes have risen faster than the average for other people. My hon. Friend should look at the figures. I shall be happy to write to him about this matter.

It is fair to say that, at the present time, the biggest problems lie in the rest of the world as the United States and Japan, in particular, struggle to adjust successfully to the massive but necessary change the has occurred over the past two years in the dollar/yen exchange rate. It is of the first importance to all of us that those two powerful nations pull back from the blind alley of a trade war and instead concentrate on measures to put their own houses in order, which in turn will underpin, as is highly desirable, the present world pattern of exchange rates.

Meanwhile, the British economy is indeed, as the headline of the leading article in today's Financial Times describes us, "an island of success". I described some of that success story in my Budget speech last month — how our growth this year will be the highest in the industrialised world, with inflation remaining low, and how by the end of this year we will have registered the longest period of steady growth, at close to 3 per cent. a year, that the British economy has known since the war. I described the massive strength of our external position, while at home unemployment is now firmly on a downward trend. All that was on the basis of deliberately cautious forecasts.

I shall not be publishing a further forecast until the autumn, in the usual way, but all the indicators that have been published since the Budget confirm that, if anything, we are doing even better than I suggested then. The PSBR for 1986–87 has come out lower than I forecast in the Budget. Inflation, too, is slightly lower than I implied in the Budget. The current account of the balance of payments is also performing better so far than I predicted. Output appears to be rising, if anything, rather faster.

This is fully reflected in the CBI's "Quarterly Industrial Trends Survey", published yesterday, which is of course confined to manufacturing industry, about which the Opposition always profess particular concern. All in all, that survey shows manufacturing industry's optimism to be at or near the highest level ever recorded, whether in respect of output, orders or exports. Of course, this was before the further cut in interest rates yesterday, which I am sure the whole Committee will welcome.

Those are the fruits of the policies that we have been consistently pursuing since we first took office.

When he rises to speak, the hon. Member for Dagenham will, I have no doubt, paint a different picture—one of doom and despair, depression and disaster. Certainly, I very much hope he does, because the more that right hon. and hon. Members opposite do so, the more nails they hammer into the coffin of Labour's credibility. All it does is to demonstrate in the clearest possible way that they are wholly out of touch with what is happening in the real world.

For the Opposition to criticise us for having increased taxation in 1979–81, when we were clearing up the mess that they left behind, is not merely an impertinence, it is Satan denouncing sin, coming from a party which is itself implicity committed to a massive further increase in the tax burden on ordinary people. The only 27 per cent. which the Labour Government ever knew was 27 per cent. inflation—and that is what we would see again if ever they were to regain office. No wonder they have committed themselves to reversing the 2p cut in income tax in the Budget. They are pleading guilty to this lesser offence to divert attention from the fact that to finance their overall spending plans would mean doubling the basic rate of income tax.

As for the Liberals and the SDP—it would be wrong to forget them altogether—they say that they will vote against the 2p reduction in income tax, but do not know whether, if they were ever to be in a position to influence events, they would reverse it or not. Their confusion on income tax parallels their confusion on every other aspect of economic policy, not to say more widely.

The whole world now recognises that our policies have created an economy that is stronger than at any time since the war. The policies of the Opposition would destroy that strength. An integral part of our policy has been the reduction in income tax, and clause 20 is a further step forward. So long as this Government is in office, it will not be the last. I would remind the House of the precise words used by my predecessor in 1979, which I have reaffirmed before and reaffirm today: our long-term objective is a basic rate of no more than 25 per cent."—[Official Report, 12 June 1979; Vol. 968, c. 261.] We do not pursue policies to meet arbitrary targets, and then sit back. We pursue them because they are right, and because they work, and we shall continue to do so.

The contrast with the Opposition could not be greater. We believe in building on success; they believe in a return to the failures of the past. We believe in a free economy and a free society; they believe in state planning and state regulation. The vote at the end of the debate will be a vote of the first importance, for it will establish beyond doubt, once and for all, which party is the party of lower taxation, and which parties are the parties of higher taxation. I commend clause 20 to the Committee.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

We oppose the clause because it is wrong. It is wrong economically and it is wrong socially. We oppose it first because, in our present economic condition, there are better things to do with £2·5 billion than to give it away in tax cuts. We oppose the clause because giving away tax cuts is likely to harm our economy. We oppose it because it forms part of an overall taxation strategy with which we profoundly disagree. We have to look at the clause against the background of the Government's tax record. The Chancellor, in his peroration, said that the debate will show which party is the party of low taxation. Therefore, we are entitled to look at the Government's claims in that respect.

The first point that should be made is that, of course, the overall effects of all the taxation changes made by the present Government have been regressive in their consequences. At the end of the day, they have benefited only those at the top of the income scale. Only those people have had real tax cuts in absolute and proportionate terms. Let us examine that claim. Again today, the Chancellor rehearsed an argument that we heard earlier from the Financial Secretary in his winding up speech on Second Reading last week. The Conservative claim has always been that it would reduce the tax burden for the country and for ordinary families. That is a fairly clear statement, a fairly clear claim and a clear objective. No one is in any doubt about what it means and what would be required if that claim were to be made.

We heard from the Chancellor and from the Financial Secretary a careful, complex attempt to deal with the awkward truth that, bearing in mind absolute rates of taxation and proportionate burdens of taxation, for the vast majority of people in this country—and indeed for the country as a whole—a greater proportion of income and of national wealth is now taken by taxation than was taken in 1979. Conservative Members try to deal with that awkward truth by talking about other matters, such as real take-home pay and real earnings—about anything other than the precise nature of their claim to have been a tax-cutting Government.

It is not we who wish to introduce the matter. It is not we who say that it is a matter of enormous importance. But since the Government insist that that is what their record shows, and since this is the test by which they themselves insist that that they should be judged, surely we are entitled to say that the facts simply do not bear that out. In case any hon. Members on the Government Benches are inclined to contest what I say, let me warn them, before they make such a rash claim, that they should recognise that the Financial Secretary, in addition to all the other things that he said in winding up the Second Reading debate, actually admitted: of course, a person on average earnings"— that includes many on above-average earnings as well— is paying more pounds in tax—he is even paying a higher percentage in tax".—[Official Report, 22 April, 1987; Vol.114, c. 760.] On my reckoning, that simple admission — that simple statement—means that no credence whatsoever can be placed on the claim that the Government have been a tax-cutting Government.

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

If the hon. Gentleman had been paying attention — he usually does, but on this occasion he clearly did not—he would have heard me deal with his point in my opening remarks. I clearly said that between 1979 and 1981, when we were clearing up the mess that we were left by the Labour Government, when we had to bring down a massive and totally unsustainable public sector borrowing requirement, we were obliged to increase the burden of taxation. Not only did I say that today, but we explained it clearly at the time, and the hon. Gentleman will find that in my Zurich speech of January 1981. That period had already come to an end by the time we went to the people in 1983 and had our mandate endorsed by the British people. Since then, the burden of taxation has gone steadily down. That demonstrates our credentials as a tax-cutting Government and a tax-cutting party. That is the direct answer to the hon. Gentleman's point.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

That statement sounded remarkably like a lengthy and unconvincing excuse coupled with a confession. It was an explanation—an unconvincing one — of why what I said was right and why the Government's claims have been wrong. It simply gave us some rationale for the confession made earlier by the Financial Secretary. Of course, the Chancellor can explain until he is blue in the face why he put up taxes between 1979 and 1981 and why, for example, his predecessor doubled VAT from 8 per cent. to 15 per cent. Of course, the point might be taken that it was not an actual doubling. In April 1979, his predecessor said: We have absolutely no intention of doubling VAT. That is a direct quotation. The raising of VAT from 8 per cent. to 15 per cent. was just 1 per cent. short of an actual lie. If the Chancellor of the Exchequer wants to take up that point, by all means let him. However, his lengthy intervention sounded like bluster designed to get away from the simple fact on which the Government are clearly very unwilling to be hooked — the Government keep drawing attention to this, not the Opposition—that they have raised the burden of taxation absolutely and proportionately for the great majority of families.

Photo of John Maples John Maples , Lewisham West 4:30 pm, 29th April 1987

How much more tax would a man on average earnings be paying if the tax rates and thresholds that we inherited from the previous Labour Government had been indexed? I believe that the answer is about £500.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

The hon. Gentleman is requiring me to have the ability of a computer to answer a totally hypothetical question, which again is no more than a ploy designed to deflect attention from this simple point.

I am very willing to move on from this point. However, Conservative Members clearly wish me to remain with it. Therefore, I can do no more than reassert the concession made by the Financial Secretary and the point that was clearly made by the Chancellor in his intervention. In case anyone in the Committee wants to dispute the matter further, I will provide one more opportunity. The present Government, during their period in office, have raised the burden of taxation for the nation as a whole, for the average family and for most ordinary families absolutely and proportionately. That is a clear and accurate statement. It is on the record. It cannot be challenged. It rests on an assertion made by the Financial Secretary.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

No, we must really move on. I suspect that the hon. Member for Carshalton and Wallington (Mr. Forman) is likely to do even more damage to his cause than has been done so far.

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

The hon. Gentleman is not prepared to give way to Conservative Back Benchers—and I regret that—but I am grateful that he has given way to me. As the hon. Gentleman is so interested in the burden of taxation, does he believe that the burden should be reduced or increased? Will he answer that, or does he think that the burden of taxation should remain exactly as it is?

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

As a preliminary remark, I notice that the Chancellor has again not taken the opportunity of disputing the simple truth that I have explained on several occasions. However, since he has asked this question, I must state that the Opposition have absolutely no responsibility for the current level of taxation. The Government's record is now under scrutiny. The Government have brought taxation to its present level. They are making false claims that I am obliged to knock down — [Interruption.] I will answer the Chancellor's question. Unlike Conservative Members, we have no inhibitions about answering questions.

The Government have mismanaged the economy. In addition to the other damage that they have done to the economy and in addition to the desperate need for investment in the economy, they have increased the burden of taxation. It is not the Opposition's responsbility to accept that level of taxation, but we must accept it because that is what we will inherit.

The Opposition are happy to state that if there is money available in the state of the economy that we inherit—and I have a long passage in my speech which I will come to in this respect if the Chancellor will be patient—that money should be used not to reduce income tax, but for investment. That is quite clear and we have no inhibitions about making that claim. We believe that money should be used for that purpose. The tax burden that the Government have established for the time being, which is higher than they inherited, should be maintained for the moment in the interests of the economy because of the weakness of the economy that we will inherit from the present Government.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

No, I am sorry. I must press on.

While there is clearly great interest in the question of the tax burden, I would have thought that Conservative Members would realise by now that their claim—which doubtless they will blithely continue to make in the coming months and years — that this Government are a tax-cutting Government flies in the face of the facts. All I can do is to lay the facts before the Committee and invite the British people to make their judgment. If the Committee really wants me to reiterate the truth, I will. However, I believe that I would be in danger of trying the patience of the Committee if I were to do that.

I want to make it perfectly clear that the changes proposed in the clause do very little to remedy the picture that I have described. Even after the changes have taken place, as has been made clear in written answers provided by the Financial Secretary—and that is presumably why he had no option but to make his confession — the burden of taxation will be greater. We are not even talking about changes that will at last make good the Government's claim to be a tax-cutting Government.

Furthermore, the Government have characteristically chosen to use the available money to reduce taxes in such a way as to produce the usual regressive effect. If the Government had been really keen to use money to reduce taxation, or even income tax, they could have done so in a way that would have benefited those at the lower end of the income scale. However, the Government chose not to do that. They again chose cynically to give the major benefits to those who are already best off in our society. If they were interested in distributing income, they could have used the money to make good the real value of child benefit. However, they chose not to. Instead. they have again given tax benefits principally to the best off. The British people will not easily forgive that. They will recognise what is happening.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

The hon. Gentleman should not be allowed to get away with that assertion. If he looks at clause 20, he will learn that there has been no increase in the higher rate bands, as opposed to last year.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

However, over the total period, those at the top of the scale have obtained enormous benefits, and a flat rate cut will increase benefits for those at the top of the scale.

The Opposition are opposed to the Government's long-term plans to shift the balance from direct to indirect taxation. I do not imagine that the Chancellor, his Minsters or any of his Back-Bench colleagues would dispute the fact that the Chancellor and his Ministers have frequently said that their long-term intention is to bring about that shift from direct to indirect taxation. In his 1984 Budget speech, the Chancellor said that an extension in VAT was the counterpart to cuts in income tax. That was the Chancellor's stated objective in 1984. A former Tory Cabinet Minister, now an EEC Commissioner in Brussels, is preparing measures which would abolish zero rating for VAT altogether. We watch with interest to see the Government's response to that proposal.

Yesterday there was a new development. I have on at least four occasions challenged the Chancellor and the Chief Secretary — I may even have challenged the Financial Secretary — to rise at the Dispatch Box and deny that work has been carried out in the Treasury with regard to a major extension of VAT. On each of those occasions the Chancellor and his Ministers sat tightlipped. They did not move a muscle. They did not utter a sound. It was left to their right hon. Friend the chairman of the Conservative party to lift a little corner on the truth, not in the Chamber or in Committee, but in a television studio, and under some considerable pressure. He confirmed for the first time that indeed there had been a study. Of course, he did all that he could to minimise its importance. He said that the study had been carried out by some little academic study group and it really had nothing to do with the Government. He said that academics get on with such studies all the time, although he thought that there had been some small Treasury contribution to the funds to set up that study. For the first time we have had an admission that a study has been carried out.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

I am delighted that the Chancellor is for the first time showing signs of rising on this point, but before he intervenes could I state that we need to know the terms of reference of that study. Who carried it out? Have conclusions been reached? What action is proposed to be taken on the conclusions? What part will the conclusions play in the Government's plans if they are re-elected for a third term? If the Chancellor would care to answer all or any of those questions, the Committee would be immensely gratified.

Photo of Mr Nigel Lawson Mr Nigel Lawson The Chancellor of the Exchequer

The hon. Gentleman is getting desperate, because there is nothing secret or hidden about the work to which my right hon. Friend referred. The Economic and Social Research Council, the Treasury and others have been jointly funding academic research on taxation since 1983. Applications for research proposals on indirect taxes were advertised in The Guardian in 1985. When the Labour party has to scrabble around to produce examples such as those to justify its ludicrous claims about the Government's intentions it shows just how threadbare it is. No work has been commissioned or undertaken inside or outside the Treasury on any proposal by Ministers to increase VAT or extend its coverage.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

I notice how carefully the Chancellor chose his concluding remarks—that no work has been done on proposals by Ministers. I wonder whose proposals were considered in that case. He carefully avoided answering any of the questions that I posed to him. If the study was as publicly known as the Chancellor suggested, why, when the Chancellor was challenged on four embarrassing occasions to come clean, did he not utter a word? Why was it that the first time we heard of this was when a non-Treasury Minister, under considerable pressure, was forced to scrabble around for an answer?

If the Chancellor would care to intervene to give us any of the answers to the questions I posed—what were the terms of reference of that study group; what were its conclusions; and what action is proposed to be taken in the light of those conclusions—we could test his claims that this study is of no consequence and that it implies nothing for the Government's plan for a third term. I see that the Chancellor, characteristically, does not propose to answer those questions — the questions that really matter. He answered in carefully chosen words drafted for him in advance, but he cannot answer the real and crucial questions which would reveal the extent of the Government's intention to shift the burden from income tax to VAT.

It is perfectly clear from the Chancellor's silence that we are in the familiar situation where the British people are being offered income tax cuts before the general election and an increase in VAT after the general election. That is the truth of the matter and that is what will be taken from this debate by the British people.

Photo of David Winnick David Winnick , Walsall North

Is it not interesting that when my right hon. Friend the Leader of the Opposition challenged the Prime Minister yesterday on whether she is actively opposed to any increase in the rate of VAT, or any extension in its scope, the Prime Minister refused to answer? If it is true that a re-elected Tory Government — it is not likely to happen, because the Tories are not likely to be re-elected — would increase VAT, as we say they would, would that not wash away the few shillings gained by people from the tax cuts, because the average family would pay far more as a result of increases in indirect taxation?

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

I am grateful to my hon. Friend. It is significant that the Chancellor has had 24 hours longer in which to prepare some sort of answer to the question on which the Prime Minister dropped an obvious dead bat yesterday. If the Prime Minister had been able to deny our assertions yesterday, she would have done so. The truth is that an extension of VAT, as we believe is proposed by the Government for a third term in office, would increase the average family budget by over £10 a week. The Government have that, prospect in store for ordinary families.

4.45 pm

The tax cuts would impact on the economy, because the use of this money to reduce income tax by 2p in the pound is likely to damage, rather than to help, the economy. The first point is that a cut in income tax is the most inflationary way of using this money to cut taxes, because it would suck in imports, make the balance of payments decline and therefore reduce the value of the pound, pushing up inflation. It would also impact directly on the balance of trade.

The Treasury forecasts a trade deficit in manufactured goods of £8 billion this year and an overall trade deficit of £2·5 billion. I hear a call "So what?" from the Government Back Benches. It reminds me that, when we pointed out the turnaround in our trade in manufactures of £13 billion since 1978, the Chancellor said, "That is neither here nor there". As I pointed out in that debate, the volume of production worth £13 billion is certainly not here, but it is there—it is in Frankfurt, Cologne and Tokyo. Those goods are being produced there, and the jobs needed to produce the goods are being created there. Our balance of trade deficit in manufactures is of the gravest significance for our economic future. Any measure, such as cuts in income tax, which will suck in further goods from abroad. close down British factories and throw further British workers on to the dole is likely to do grave damage to our economy.

Let us look at the argument about the beneficent effects of income tax cuts on incentive. We do not hear much of it today, but we used to hear a great deal of how income tax cuts would make everybody work harder and longer. It is difficult for the Chancellor or any other Minister to make that argument today, because a study commissioned by the Treasury, published recently, called "Taxation and family labour supply in Great Britain", concluded that even substantial changes would make virtually no difference whatsoever to the number of hours worked by most people. That study, commissioned by the Government, blows out of the water the reasoning which lies behind the case for improving incentives through cutting taxation.

Photo of Michael Fallon Michael Fallon , Darlington

The Treasury study dealt with the incentives for those in work; it did not deal with incentives in the taxation system for those out of work. Can the hon. Gentleman explain how somebody who is out of work in the north-east is more likely to take work if his income tax were to be increased and his take-home pay reduced, as it would be if the Opposition's vote tonight were successful?

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

The hon. Gentleman thinks he is making a separate point, but it is exactly the same point as was considered by the Brown report. It is simply a question of incentives to work additional or any hours to improve one's income above the current and presumed level. This reports bears out what common sense would have told Ministers a long time ago: if one reduces taxation, the likely effect on the ability or willingness of people to work is that they will work less and will earn the same income for less work. Many people, on purely common sense grounds, would choose to respond to that by not working as hard.

Furthermore, the Government have to explain why tax incentives are required to get those in work who are at the top end of the income scale to work hard, whereas the disciplines required to force unemployed people to work are cuts in benefits and cuts in pay. That is the difference. That is the affront to common sense that the Government have to explain. That is the socially divisive policy to which they have attached their name and attitudes.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

The import of the point that the hon. Gentleman has just made seems to be that if the Labour party were to take office, which I doubt, it would seek to put up income tax and thereby get people to work harder. Is that the conclusion that he is drawing?

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

The argument that the hon. Gentleman postulates is not one to which we have ever paid any attention. It is the Government who maintain that the incentive effect of taxes is crucial and it is the Government's own study that shows that that claim is ill-founded. Again, the Government put up a target which is all too easily knocked down. But it is not our target. It is not an argument that Labour Members would wish to make.

The major objection to these tax cuts is that they pass up a real opportunity to use resources which have come in an uncovenanted way to the Chancellor. They have come, for example, because corporation tax, contrary to the Chancellor's assertions earlier, has proved to be a more buoyant revenue raiser than was foreseen when the 1984 tax changes were made. He has used that money not for the purpose of investing in the real needs of our economy, which is desperately crying out for that investment, but for purposes that will harm that economy.

The Government's model of the economy and the London Business School's computer model of the economy, neither of which is particularly confident or helpful to our case, show clearly that the Government's chosen course of tax cuts is four times less effective than if that money were invested in the same quantities in our economy to create employment and increase output. If we had used that £2·5 billion, the models of the economy—on which, again, we place little reliance, but which the Government have always maintained are important guides to economic policy — show a 4:1 ratio between the number of jobs created by investment in our economy and tax cuts.

That is the chance that the Chancellor has passed up. That is the extent to which he has turned his back on the unemployed. With £2·5 billion at his disposal—he had more, but he has chosen to use £2·5 billion for tax cuts—he could have invested in our infrastructure, in our skill training and directly in our industry. He could have done all those things, but he has allowed a situation to develop in which manufacturing investment languishes at 20 per cent. below its 1979 level.

The Chancellor asks about the CBI survey. Why does he not look at "Fabric of the Nation", the report produced by the CBI complaining that shortage of investment was ruining our industrial infrastructure? Why does he not look at the Manpower Services Commission, another Government-sponsored agency, which says that we are training eight times fewer engineers than the Japanese? Those are the things on which the money could have been spent. Those are the things on which a Labour Government would spend that money. The real charge against the Government is that, for cynical electoral reasons, they have passed up an opportunity which could have benefited the economy.

The case against tax cuts is so substantial that it is impossible to believe that they have been proposed by the Government for any better reason than that they make the cynical judgment that the floating voter is as avaricious, selfish, short-sighted and unconcerned for the general interest as the average Tory Back Bencher.

That judgment is as mistaken as it is cynical. It is a judgment that is not shared by the British people. Indeed, it is not even shared by the British Institute of Management, which, in February, said that managers preferred some specific increases in Government spending to a cut in taxation. Only a quarter sought tax cuts before some increase in public expenditure. The increases in public expenditure on infrastructure that were announced in the public expenditure White Paper—who was saying that they had not got it?—were not enough, according to the British Institute of Management. It said that managers strongly support direct measures to tackle persistent high unemployment.

That is the option that was available to the Government. That is an option recognised not just by the Labour party but by many people in society, the British Institute of Management and many other institutions. All the opinion polls tell us that the British people reject the cynical bargain offered by the Government. They will reject that cynical deal. They know that tax cuts are not the way to obtain decent housing, and proper pensions, schools and housing. They know that that is not the way to get what only community provision can make available to them. For that reason, they will reject the Government's offer, as we shall do tonight.

Photo of Mr William Clark Mr William Clark , Croydon South

It is always a pleasure to listen to the hon. Member for Dagenham (Mr. Gould). Most of us look upon him with generous feelings and some friendship. However, we feel some sympathy for him in advocating a policy on behalf of the Labour party with which he does not agree.

It is obvious that with the hon. Gentleman's intellect and experience of finance there is no way in which he can talk about the Government giving away £2·5 billion. On thresholds, he will agree with me that the Government have kept well in front of inflation and that the lower paid are better off than they would have been if we had followed the principles followed by the Labour Government on the starting rate of tax. I have no doubt that he will agree that the standard of living in Britain has increased tremendously since 1975, which was not the case before the Government took office.

The hon. Gentleman says that we have not decreased direct taxation, but he is not facing the facts. The standard rate was 33p in the pound and it is now—or will be—27p. The top rate was 98p and is now 60p. He talks about the 2p reduction being inflationary, but the logic of that is that we should go back to 33p. Apparently, if a reduction of 2p in the standard rate of taxation is inflationary, to avoid that we should go back to 33p. However, I remind him that when it was 33p we had inflation of about 27 per cent. Now we have inflation of about 4 per cent.

The hon. Gentleman talked about the reduction in the standard rate sucking in imports, but if he looks at the Labour Government's balance of payments record, for practically every year of that Government there was a deficit in our balance of payments. That position has been completely reversed by this Government.

I do not think that the hon. Gentleman believes all that his colleagues forecast. Just before the 1983 election the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said that inflation would be in double figures. Double figures means 10 per cent., but it has not been 10 per cent. since 1983, and it is 4 per cent. now. Another of his colleagues said that unemployment would rise to 24 per cent., but in fact it is 11 per cent. It was also said that the National Health Service would be dismantled within five years, but that has not happened. It was said that we would become a bankrupt nation and that output would go down, but since 1983 output has increased tremendously. It was said that pensioners would be much worse off after 1983 under another Conservative Government, but under this Government the pensioners have had an increase 4·5 times greater than under the previous Labour regime.

The VAT smear with regard to food, and so on, that is now going around has been answered by my right hon. Friends the Chancellor and the Prime Minister.

What the Labour party has not said, and what the hon. Member for Dagenham avoided, is the effect of its policies on VAT. I remind the hon. Gentleman that if the promises of his hon. Friends, and even the official policy of his party, were implemented, they would lead to a VAT rate of about 49 per cent.

The hon. Member for Dagenham did not deal with what the Labour party's plans for increased expenditure would mean for the standard rate of tax. It would mean a standard rate of tax of just over 50p in the pound as a starting point and VAT would be about 48 or 49 per cent. The Labour party should address itself to these points and explain to the electorate what it plans to do.

5 pm

The hon. Member for Dagenham said that the Chancellor underestimated the amount that he would receive from corporation tax. The reason for the Chancellor receiving more from corporation tax is the increased profitability of companies.

Photo of Mr William Clark Mr William Clark , Croydon South

Perhaps the hon. Gentleman will allow me to finish and get my facts right before he attempts to distort them.

We must realise that, if the profitability of a company increases, by necessity the Chancellor's take is greater.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

I do not dispute the point that the hon. Gentleman has made, but he fails to take the one that I made. Far from being revenue neutral, the changes that were announced in 1984 — accepting the level of profitability of the corporate sector today — have produced £1 billion more in corporation tax than would have been the case without those changes. That is nothing to do with profitability.

Photo of Mr William Clark Mr William Clark , Croydon South

This worries me. The hon. Member for Dagenham is the Labour party spokesman on finance. If he believes that the neutrality of corporation tax is not dependent on the profitability of companies, he is whistling in the dark. Obviously, one can reduce taxes and receive a greater take if the income of a company increases.

I cannot understand the Opposition's claims of gloom and doom with regard to the Budget. The CBI, which mainly represents manufacturing industry, is extremely optimistic and bullish. There is no question but that the economy is in better shape than it has been for many years.

Let us look at the public sector borrowing requirement. I was surprised that last year's borrowing requirement was so low, and on that I congratulate my right hon. Friend the Chancellor. The Chancellor is not over-optimistic. He takes a very pragmatic approach to the outcome of the year's finances. The public sector borrowing requirement is very low at £4 billion. That achievement is not recognised by many people in this country. Output is going up.

The Labour party gives me the impression — I am sure that it gives the rest of the country the same impression—that it is the party of higher taxation. It always has been. The history of Labour Governments since the end of the war shows that they have always increased taxes. Conservative Administrations have reduced them.

The hon. Member for Dagenham—I welcome this—said that he was pressing my right hon. Friend the Chancellor on his plans for his third term. That is fairly defeatist talk on behalf of the Labour party. Apparently, it has realised that we shall have a third term and that, with the advent of polling day, my right hon. Friend v. ill still be Chancellor of the Exchequer.

I welcome clause 20 because I am convinced that it is right. As a starting rate 27p is still too high, and I welcome what my right hon. Friend the Chancellor said about the target being 25p. I noticed—I will not press him on this point—that he did not say what the higher rate would be. At some time I should like to tell him what I think the top rate should be.

Anybody — including the hon. Member for Dagenham—who says that this is an election or bribery Budget and that the reduction of 2p in the standard rate of tax has been made to gain votes should think again. I wonder what the Labour party would say if it went through every Budget since 1979. Direct taxation has been reduced in each successive Budget. There was no election in 1980, 1981, 1982—in 1983 there was—1984, 1985 and 1986, but there has been a continual steady reduction in the burden of taxation. The lower we can get direct taxation, the greater the incentive for people to work, which is what we want for a prosperous society. That is what we are becoming, because we are in a much more prosperous situation today than we have been for many years.

Photo of Mr Ian Wrigglesworth Mr Ian Wrigglesworth , Stockton South

The hon. Member for Croydon, South (Sir W. Clark) referred to taxation and reductions in taxation, but in this clause we are only dealing with the reduction of income tax.

The hon. Member for Dagenham (Mr. Gould) was right to point out that if one is talking about all taxes—customs duties, employees' national insurance contributions, VAT and the whole range of taxes—the Government have increased the burden of taxation.

We are dealing with income tax, and whether it should be reduced by the 2p that the Chancellor is proposing. The Chancellor said that it was the policy of the Government, and the Conservative party's view, that income taxes should be reduced as and when prudent. I was pleased to hear him say that. However, unless we can deal with unemployment, the problems affecting the Health Service, education and training, housing and many others such as the lack of research and development in industry and the brain drain, it would not be prudent to reduce income tax. If we can start to deal with those problems in a substantial manner, we can see no reason for keeping income tax or any other taxes a penny higher than we must.

We would have preferred to see the Chancellor in his speech today and in his Budget speech and Ministers in their speeches pay much more attention not to the inflated, exaggerated claims about the performance of the economy at the present time but to some of the problems that face the country, some of which have been exacerbated by the policies of the Government after nine years. It is to those problems that we should be addressing our minds this evening because they are the long-term problems which, if not overcome, will undermine the long-term success of the economy and industry. They are the problems to which the people of this country want to see their Government addressing their attention and resources.

Let me deal first with what is undoubtedly, in most people's minds, the No. 1 problem facing the country—to which the Chancellor's Budget pays hardly any attention — unemployment. All the evidence we have from consistent findings in opinion polls, from our experience as Members of Parliament in our constituencies and throughout the history of the past three or four years shows that unemployment has been the anxiety about which the people have felt most strongly. However, the Government have paid little attention to it in speech after speech and policy after policy.

The reality is that, after all this time of Conservative rule, we still have in excess of 3 million people available for work. This figure includes those who are not on the register, because those on the register are simply those registered for benefit, and there are many more people who want to work. Those of us who represent areas of high unemployment — my county has the highest level of unemployment of any in Great Britain, except the Western Isles—believe that unemployment at over 20 per cent. is a scandal and should be a top priority for the Government.

Before the Budget, we put forward proposals on how we believe that the Government should be using their resources to get those people back to work and make it possible for them to seek fulfilment in work, with a better income. We showed how the economy would benefit by the increased wealth that would be created if that unused capacity, that unused resource of people, was in use.

We believe that, by embarking on a programme for expansion of some £4·9 billion, we can, over three years. get about 1 million people back to work. That will still leave an unacceptably high level of unemployed people. I wish that the House and its Committees would spend more time considering the problems that every party in the House knows will be there. We shall have at least 2 million people wanting work, no matter which party wins the general election and no matter what policies are introduced.

That is why we believe that the second priority for the Government, rather than cutting income tax, is to deal with that problem of unemployment, which means that a substantial number of people in Britain today are facing considerable hardships. Furthermore, the benefits for pensioners and those hardest hit by unemployment and the recession should be increased.

Thirdly, we believe that one must consider the long-term future of British industry and the British economy, and we believe that a number of measures are necessary to build for that future. Foremost among those I put education and training. When the Government came into office in 1979, they began to destroy the training system. They abolished the training boards and the apprentice opportunities that used to be available to thousands of young people when they left school.

After a time, as unemployment went through the roof and the Government began to get very worried about the electoral consequences of the level of unemployment and realised that they must do something for the unemployed young people, they introduced the youth training scheme and spatchcocked it together. We were delighted that the Government introduced that scheme. We pressed them to extend it to two years and we were delighted when they did so. We supported the Government when they introduced the youth training scheme, but the scheme still has a great deal further to go if it is to make a contribution to the skills and future of our young people in the way that it should.

5.15 pm

The first and most important thing that must happen to YTS, apart from putting extra resources into it and ensuring that people get the skilled training that they need for the rest of their lives, is to give it an accredited status so that it can be used to get further qualifications. It is no good doing a two-year youth training scheme if at the end of that time one has nothing of value to take either to an educational or training institution or to an employer, such as an O-level or a CSE.

I am pleased that Ministers have responded to my pleas and those of my colleagues for a move in that direction, and that the Manpower Services Commission is working on a programme to get accreditation for the youth training scheme so that it dovetails with the rest of our education and training system and gives young people a real opportunity. Putting resources into that is a top priority if we are to succeed against competing countries such as Japan, Taiwan, South Korea, Hong Kong, America, and Germany, all of which have education and training systems that make ours look sick.

There is a great thirst for education in places such as Hong Kong, where half the population is under 21. The small country of South Korea, with 15 million people, is producing four times as many graduates in information technology as both this country and West Germany combined. That is the challenge that faces our country, not the challenge of people in work getting a cut in income tax. We want more resources to go to education and training so that we can match the output of graduates and skilled people from our educational and training institutions with those of other countries such as Japan, America and Taiwan.

One sees in the education institutions of the world people from China, Hong Kong, Taiwan and other countries with an enormous thirst for education. We must encourage that thirst here and provide the resources for it.

As a priority, the Government must also pay attention to our manufacturing industries, to research and development and to ensuring that highly qualified people from educational institutions come into industry and make it a top priority. It has been palpably obvious to everybody since the Government came into office that they do not care a hoot about manufacturing industry. We have heard all this talk about the services industry and we heard it again today. The Tories say, "Don't worry about the deficit in manufactured goods. Don't worry about the billions of pounds and record level of manufactured deficit."

Photo of Sir Raymond Gower Sir Raymond Gower , Vale of Glamorgan

How does the hon. Gentleman explain the fact that action by Government is not always necessary? How does he explain the great recovery in our textile industry?

Photo of Mr Ian Wrigglesworth Mr Ian Wrigglesworth , Stockton South

The textile industry is like other industries. It was hit in the face and knocked flat on its back by the Government's policies from 1979 to 1981–82. It is now getting back up on its knees again and Ministers say that that is a wonderful miracle. One industry after another has been in that position. They have been almost destroyed. Many have gone out of business, which is why we have lost 22 per cent. of our manufacturing industry.

All that has happened because of the policies that the Chancellor has demonstrated that he wants us all to forget about. He wants to forget about what the Conservative party did to this country between 1979 and 1982. That was the black period for manufacturing industry, as one company after another went bankrupt and the level of unemployment went up through the roof. It has stayed up there ever since. That was the period that the Government want to wipe out. They are like Stalin: they want to forget parts of their history; they want to forget that that period existed. Let me tell the Chancellor and his colleagues that we will not allow them to forget the 1979–82 period when they followed their monetarist policies.

Now we are witnessing a change. It has occurred in the past few months and was contained in the Chancellor's autumn statement. Public expenditure has been anathema to the Conservatives. The right hon. Member for Leeds, North-East (Sir K. Joseph) used to talk about public expenditure as if it were a swear word. Public expenditure was not something that was embarked upon by Conservative Governments true to the faith. Goodness me, look at the Chancellor's autumn statement and consider the press releases—some extremely expensive—issued by Government Departments. The statement and those press releases boast about public expenditure. When the Government first came into office we heard a great deal about them taking their hands off industry, not intervening in industry and having nothing to do with market forces. However, the Government are intervening in market forces all over the place. One almost needs the help of a management consultant to go through all the schemes that are available from the Department of Trade and Industry.

I welcome all those changes, but that was not what the Government had in mind in 1979. Then they said that we should abolish all such schemes. This week we had a new announcement about inner-city initiatives and partnerships with local authorities and the private sector. We have been asking for that for years, but it is only in recent times that the Government have been converted. Over the years, requests have been made for urban development corporations. How long have the Government been refusing proposals for a development agency in the north and the north-west? They have not closed down the Scottish Development Agency or the Highlands and Islands Development Board. Such intervention is line because they know that if they tried to abolish those bodies there would be an outcry and they would lose even more Scottish votes. My goodness, as ballot boxes loom large on the horizon, the Government have changed their attitude.

Photo of Mr William Clark Mr William Clark , Croydon South

Does the hon. Gentleman agree that, in 1979, British manufacturing industry was so uncompetitive and overmanned that it was inevitable that, if we were to survive, all surplus labour had to be shed? Does the hon. Gentleman not agree that, in the autumn statement of last year, the Government said—successive Conservative Governments have said the same — that when the economy was strong enough, more resources would be put into public expenditure? My right hon. Friend has been able not only to increase public expenditure on education, roads and the rest of it, but, at the same time, to reduce taxation and reduce the borrowing requirement. Surely credit should be given for that.

Photo of Mr Ian Wrigglesworth Mr Ian Wrigglesworth , Stockton South

I cannot stand the Conservative party propaganda that is presently pouring out from Tory Back Benchers. To suggest that 20 per cent. of the manufacturing capacity of Britain was completely lost simply because firms were inefficient is unbelievable.

The hon. Member for Croydon, South should look at the history and talk to some of the managers in the manufacturing industries. The Conservatives should accept that firms went bankrupt because of the exchange rate and interest rates—they were crippled by them and could not remain in business. During 1979–82, the exchange rate against the dollar was $2·40. We then went almost to parity with the dollar and now the rate is $1·60. How can businesses try to organise their planning, marketing, manufacturing or investment when there are such fluctuations in the exchange rate?

I believe that the Government should use their resources to benefit the Health Service. Recently, we have heard a number of boasts about how much the Government are spending on the Health Service. However, when the Government talk about the resources that are being spent on the Health Service, they never tell us about the demands that are placed on those resources. We believe that we must spend an extra 2 per cent. a year on the Health Service to sustain it at its present level.

We are all aware that we have an increasingly ageing population who need more care. Modern technology in the Health Service means that it is becoming more expensive to treat people. To sustain the hip replacements and other operations that are presently carried out, we must increase expenditure by 2 per cent. a year.

What is happening to the Health Service today? The Government are demanding productivity increases from the hospitals and are demanding that the health authorities pay for an element of the pay increases that the Government have agreed. They tell district health authorities that the Government will increase nurses' pay—they have said this for the past three years—and will increase Civil Service pay, but they will not give the money to pay for those increases.

I concede that the Government are giving almost all the money to meet the recently announced nurses' pay increase, but an element of that increase must be found by the Health Service from other resources. That is leading to a dire financial crisis for the North Tees health authority. A deputation from that authority will shortly meet the Minister because of that crisis. It cannot sustain the present level of health care unless the Government are prepared to make extra funds available.

The North Tees health authority has an excellent record of efficiency and productivity. There is one general hospital in Stockton — just outside my constituency —that serves the North Tees district, which covers my constituency. It has an excellent record. However, it cannot increase efficiency and productivity—that health authority has been cut to the bone. It is impossible for that authority to find the resources within its budget to meet the nurses' pay increase and the increase in civil service pay agreed by the Government. Therefore, cuts in clinical services must be made. It is a sick joke to my constituents to be told by the Chancellor that they should welcome a 2p cut in income tax. Such problems do not affect Stockton and North Tees alone; they affect district after district.

I agree that, as the Chancellor said, "as and when it is prudent" taxation should be cut. Against the background I have described, we believe that it is not prudent, nor is this the time, to make taxation cuts. If it is possible, we shall achieve our priorities without increasing taxation.

The Chancellor tried to goad me earlier about our position on tax cuts. We shall make our position absolutely clear before the general election, when our studies are complete. If we believe that we can achieve our priorities on unemployment, on the Health Service, on education and on industry without going back to the old rates of tax, we shall certainly do so. We shall publish more detail and more information, as we have done about all our Budget proposals for the last three years, than any other Opposition party, including the Conservative party when it was in opposition. We have given more details and more costings of our proposals than any other party has given.

Before the election, we shall publish full information for everybody, whether political parties or the public, to examine. We have published credible policies that could help get industry back on its feet, that could help to take care of those who have been hardest hit by the recession and above all that could start to get people back to work. Because the Government are not prepared to face up to those priorities, we shall vote against the clause.

Photo of Sir Raymond Gower Sir Raymond Gower , Vale of Glamorgan 5:30 pm, 29th April 1987

While we understand much of the theme put forward by the hon. Member for Stockton, South (Mr. Wrigglesworth), I think that he tends to exaggerate what can be achieved by public spending. He seemed to imply that the more the Government spend the better it is for industry, and that any money released through tax concessions is injurious to the country. I challenge this view. I do not think that Britain achieved its pre-eminence over 100 years ago by the extent of its public expenditure. It was done by the active ingenuity of industrialists and the work force over a long period of time.

The feeling of politicians in those days was that it was better to allow money to fructify in the hands of the people than to accumulate in the hands of the Government. All that the hon. Gentleman told us is at variance with that doctrine. The view of the Opposition parties is that only in the rarest circumstances are tax concessions of benefit. Psychologically, apart from any other reason, tax concessions have a splendid effect on the economy of any country.

It is not just the exact impact of tax concessions that one must study. One must examine their effect on the mood of a country. In that context, we are apt to underestimate the benefit of what the Chancellor has done. Undoubtedly, when the Government came into office there was a period of great difficulty. In the first two or three years they could not do what we like doing best. We prefer to introduce tax concessions rather than tax increases. I can well recall the days of Labour Governments from 1964 to 1970 and fom 1974 to 1979. In each Budget we looked for the new imposts and the additional burdens that were being placed on industry and on individuals. How different things are today. In my right hon. Friend's Budget, and in the last two or three Budgets, we have seen what tax reductions we can identify. Surely that is much more in keeping with our record in the past and our hopes for the future.

Clause 20 is much narrower than one might think from the speech of the hon. Member for Stockton, South. It is limited to one tax concession, namely, on income tax. I confess that I do not take the view that it is always best to make concessions in this way. Sometimes I would prefer other tax reliefs. For example, the tax thresholds might be raised, but that has been done in previous Budgets. If we combine the tax concessions of recent years, we see that the benefits have been widely spread. Not least to benefit have been companies, which have had tax reductions.

The hon. Member for Stockton, South referred to the difficulties of industry in his area. He implied that those difficulties all started with the Conservative Government of 1979. It was as though it was only then that we began to shed opportunities for people to be apprenticed in industry. The decline in apprenticeships spans a longer time. I agree with the hon. Gentleman that the training programme should be expanded and that we should consider critically the Government's contribution to training and research in industry.

In the short term, and perhaps in the moderately long term, it is desirable to increase the return of money to producers and earners. Of course we want them to have more, but I do not think that we should set the interests of earners against those who are not working. We should try to reduce the number of unemployed. Much has been done by my noble Friend the Secretary of State for Employment. I foresee a considerable increase in training in the coming months and years. This has to be a gradual process. It cannot be achieved immediately in the context of this tax concession.

I welcome the change in taxation. It is wrong always to describe it as a concession. It is valuable for all who are employed in industry and for industry itself. It will lead to an increase in earnings and lessen the pressure for wage and salary increases, which will he an additional benefit.

Above all, psychologically this tax change is a stimulating, attractive feature of the Administration. Coupled with the increase in production that has occurred successively for many years, it should lead us after a long period of trial to believe that the economy is on the upturn. We should not be foolishly optimistic, but, nevertheless, we can look to the future with a soberly increased confidence. I hope the hon. Gentleman will share that view.

Photo of Nick Raynsford Nick Raynsford , Fulham

We are debating tax cuts. We have heard many strange and dubious claims advanced by Conservative Members. The most dubious and most suspect is the claim that tax cuts have helped and will help those on average and below average incomes. It is that issue that I wish to address first.

First, that claim can be substantiated only by a highly selective presentation of statistics. We have heard such a travesty of statistics this afternoon in the claim that the Government have made tax cuts. When they are pressed, their definition changes — the ground rules change. Instead of talking about tax cuts, they say that they are talking about income tax cuts, neatly forgetting the wider tax implications of national insurance rates and VAT, which have both increased under this Government, despite the dishonest claim by the Prime Minister immediately before the 1979 general election that she would not increase VAT. As we all know, thereafter came that swingeing increase to 15 per cent.

Secondly, in terms of overall tax, particularly for the lower paid, it is simply not true that there has been a reduction. They have borne the brunt of the much higher rates of indirect taxation, such as VAT, as well as increased national insurance contributions. In addition to the selective use of the word "tax" to limit it to income tax, there has also been selective amnesia as a convenient way of forgetting that the Government inherited a reduced starting rate of taxation of 25 per cent. from the last Labour Government. Of course, that meant that the lower paid paid less income tax than now, even after eight years of Tory Government claims to be reducing the basic rate of taxation. That is a point readily forgotten by Conservative Members when they talk about the rate of income tax.

Thirdly, Conservative Members ignore the wider implications of their policies, particularly those relating to social security benefits, which are especially relevant to the low-paid and those on below average earnings. When such people consider their disposable income, they must consider not only their income tax and national insurance. They also need to know how much income is left after their entitlement, or withdrawal of entitlement, to various means-tested benefits.

The hon. Member for Darlington (Mr. Fallon) — I am sorry that he is not in his place—made a remark earlier in the debate that I wish to pick up. He put forward the proposition that lower income tax would be an incentive to the low-paid to work. I wish to examine the detailed implications of the Government's policies for the low-paid. Over the past eight years their position has worsened dramatically. I shall illustrate that with a typical example of a person in low-paid employment who is paying tax and national insurance and receiving housing benefit. That benefit is widely available in the form of rate rebate for home owners and, more generally, in the form of rent and rate rebate for tenants.

In that context, there has been a serious deterioration in the position of the low-paid. A tenant receiving a rent and rate rebate, and paying lax and national insurance in 1979, would have lost 62 per cent. of any increased income. That would have been his marginal rate of taxation after losing 33 per cent. tax, 6 per cent. national insurance, and 23 per cent. through the withdrawal of his means-tested benefit. The Chief Secretary will note that I am not quoting figures for a family on the lower, 25 per cent. rate of income tax. I am quoting figures for the basic rate of 33 per cent.

By 1987 the position has changed as follows. The income tax rate has declined from 33 to 27 per cent. National insurance has risen from 6 to 9 per cent. and the loss of means-tested housing benefit has moved from 23 to 46 per cent.—it has doubled during the period. So a family or single person in that position will lose, not 62p out of every extra pound earned, but 82p. That reveals the hypocrisy of the Government's claim to be helping the low-paid. The Government have seriously increased the loss of income to someone in low-paid work who obtains a pay rise. Such a person is now losing at the fantastic rate of 82p in the pound. What greater disincentive could there be for people to seek higher paid work? That is the legacy of the present Government, but it is not the full story.

5.45 pm

Worse is to come. The Government's social security proposals, to be introduced if, by mischance, they remain in office next April, will mean that the rate of withdrawal of means-tested benefits will increase more steeply. As from next April, a person receiving housing benefit and paying tax and national insurance will lose no less than 87p out of any extra money that he earns. We are talking about hundreds of thousands of people in low-paid work, to whom the Government's policies have meant, not cuts in taxation, but swingeing increases in the rate at which they lose the extra pay that they earn — hardly an incentive to encourage the low-paid to work; on the contrary, a steeper withdrawal of benefit.

What a contrast that presents to the treatment of the wealthiest 5 or 10 per cent. of the population, who have done very well indeed out of the selective tax cuts that the Government have made. For them, a rate of taxation of 87p in the £ would have been described, in the Chancellor's earlier felicitous phrase, as penal. The Government regard such taxation as wrong and as a disincentive to the richest people in the country to stay in Britain and work. Yet the Government who take that line with the richest are happy to apply that penal rate of taxation to the poorest people in employment — not the poorest in society, but the poorest in employment. That reveals the hypocrisy behind the Government's stance on tax cuts.

The Government's policy is grossly unfair, but it is not only its unfairness that leads us to oppose the proposed cut in the standard rate of income tax that is incorporated in the Bill. We do so, as other speakers have said, because of the waste of opportunity that it represents. It is a wasted chance to use the £2·5 billion that is involved to help to revive the country's economy. The Budget has failed lamentably to tackle Britain's key problems. It has failed, as other speakers have made clear, to remedy the continuing scandal of unemployment. Greater priority should have been given to measures to reduce unemployment dramatically. It is not enough to fiddle the figures in the hope that they will fall below 3 million some time later this year. We need concrete measures that are designed to get people back to work of the kind that the Labour party is advocating in its policy to put 1 million people back in employment in the next two years.

We have witnessed the neglect of the Health Service and the tragedy that has beset one of Britain's most important and best loved institutions in recent years as a result of Government policies. It has affected my constituency, too. The Health Service has been denuded of funds, the staff have become increasingly demoralised and hospitals have been threatened with closure. Three hospitals serve my constituency, one of which, the West London hospital, which has a fine reputation for dealing with maternity cases, has been under threat of closure for the past nine months. The threat has been postponed only by a temporary additional injection of finance to enable the decision to be postponed, because it would be electorally embarrassing to take it immediately before a general election.

Charing Cross hospital is short of 150 nurses because they cannot afford to find accommodation and live in central London. I spoke to them about the need for additional pay. I am pleased that the Government have agreed to implement the pay review body's recommendations immediately this year—would that they had done so in previous years when there was no election on the horizon, and would that they had agreed then to implement the recommendations promptly and in full from the date on which they should have applied. At least this year they have done so, but that is not by any means sufficient.

Last week a nurse in my constituency said to me, "I cannot afford to continue in the profession. One of my friends who also qualified recently has left the job and become a receptionist to a solicitor. Now she is paid more than twice as much as I am." In areas such as Fulham, where there are acute housing problems, it is hardly surprising that the Health Service is bleeding to death, because key staff are leaving and wards are being closed. That is happening in our key public services.

Housing, which we debated yesterday, is a further factor. Government policy makes financial nonsense. They have cut expenditure on housing and are not building the new houses that are needed. The DHSS is spending more money than would be necessary to build new houses on subsidising private landlords who are exploiting the housing shortage by offering squalid bed-and-breakfast accommodation at an extortionate cost to homeless families who should be housed. That is only one consequence of the Government's tragic failure to invest money in homes for the needy. The Government are pouring money down the drain on absurd and ineffective subsidies rather than investing it in homes that are needed. That is a further damning comment on the Government's failure.

The Government's record on pensioners is no better. Last year pensioners were given a 40p increase in their pension, which they rightly condemned universally as an insult. This year the Government have felt more generous and have offered an 80p increase. Most of my pensioners know that that is just as insulting and demeaning as last year's increase. The Government's priorities are wrong. They can afford policies that give large sums in tax concessions to the wealthy, yet they cannot afford to give an increase of more than 80p to pensioners. Our pensioners receive the lowest level of pension of any country in western Europe, except for Greece. What a damning comment on the legacy of the Government.

The Government's policies have failed across the board and investment is needed in many areas, but has not been forthcoming. In the Budget the Government have chosen to use their money in a way that fails to tackle our real problems and needs. For that reason, we reject the 2p cut in income tax. It is not the right decision or priority, it does not concentrate resources where they are most needed and it is not right for Britain. Therefore, we shall vote against it.

Photo of Tim Yeo Tim Yeo , South Suffolk

The hon. Member for Fulham (Mr. Raynsford) began his speech by saying that this was a debate on income tax. He then diverted to housing benefit—a subject on which I know he is an authority—the Health Service and pensioners. He was reluctant to talk about income tax.

The hon. Gentleman referred to the lower rate of income tax that existed before 1979. It was a rate of 25 per cent. which applied only to a small number of people in a fairly narrow income band. Perhaps he is reluctant to talk about income tax because, if the Committee approves this clause, as I hope it will, a rate of tax of only 27p in the pound will apply, not only to a narrow income band of people on well below average earnings, but to everyone who earns up to £17,900 a year, which is well over one and a half times national average earnings.

If the Government are re-elected, as I am sure they will be, no one can be in any doubt that it will not be long before we have a basic rate of income tax of 25 per cent. for everyone earning up to one and a half times and perhaps even twice national average earnings, as the Labour Government had, but only for a small group of people who were earning well below national average earnings. Therefore, perhaps it is not surprising that the hon. Gentleman did not wish to address income tax in great depth.

The hon. Gentleman also referred to national insurance contributions. I appreciate that he has not been in the House for long—indeed, for an even shorter period than me — so perhaps he does not recall that in 1985 the Chancellor of the Exchequer announced substantially reduced employee and employer national insurance contributions for people on below average wages. The starting rate of employee national insurance contributions, with which we are most concerned here, has been cut to 5 per cent. by the Government.

Photo of Nick Raynsford Nick Raynsford , Fulham

May I remind the hon. Gentleman that, when I compared the 1979 and present levels of income tax, I deliberately chose not to use as my example the 25p lower rate band? I simply made the point that that rate had applied and that Conservative Members were forgetful about it. For comparable reasons, I did not use the starting point for the lower rate of national insurance contributions because it, too, applies only at the bottom end of the income scale. For fairness, I chose the standard rate of income tax, not the lowest rate that applied in 1979 and the national insurance rate which applied to the overwhelming majority of people in paid employment—9 per cent.

Photo of Tim Yeo Tim Yeo , South Suffolk

I suspect that the electorate will also be forgetful when everyone earning up to one and a half times national average earnings is enjoying a rate of tax of 25 per cent. Not many people will recall that, under a Labour Government, a small group enjoyed that rate of income tax. People on average earnings, about whom the hon. Gentleman said he was concerned, have the prospect of paying less income tax now and in the future than they paid before 1979.

The hon. Member for Stockton, South (Mr. Wrigglesworth) also began by saying that the debate was about income tax cuts, but he spent about 25 minutes on all the usual SDP sob stories. We had a great deal about manufacturing industry, several minutes on the National Health Service and several minutes on education and training, but without any mention of the policies of the president of the SDP. Finally, he found time to mention income tax. He could not answer my right hon. Friend's question about the SDP's position on income tax cuts, presumably because there is still confusion within the SDP about whether income tax should be higher or lower. If the hon. Gentleman were present, I would offer him a further opportunity to clarify that.

The hon. Gentleman explained that his studies were not yet complete. No doubt he has left the Chamber to rush off and join his colleagues in their work on ascertaining whether it is prudent to be in favour of higher or lower income tax. Indeed, it is rather a touching picture. One can imagine them closeted in a room, perhaps in Cowley street, with towels around their heads, sweating it out and trying to work out their policy on this issue, possibly assisted by a few woolly-headed academic economists.

I hope that the leader of the SDP has not been aware that that work is not complete, because only about four weeks ago he was predicting that the general election would be on 7 May. Where would we be now if, halfway through the general election campaign, the SDP were still telling us that its studies were not complete and it could not tell the country whether it wanted higher or lower income tax?

The hon. Member for Stockton, South seemed upset that, over the past four years, Government policy had not matched up to what he thought Conservative party rhetoric had been before 1983. He seemed to be trying to fight the 1983 general election all over again. If he does that, we can undoubtedly look forward to a similar result. Again, if he were present, I would ask him whether he had any criticism of Government policy since 1983, because presumably that is the period on which the electorate will shortly be asked for its verdict.

The hon. Gentleman said that he would favour income tax cuts when they were prudent. Unemployment is falling, interest rates are falling, the PSBR is falling—

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

The Government are falling.

Photo of Tim Yeo Tim Yeo , South Suffolk

—output is rising, productivity is rising and the pound is rising. The background does not look too bad to me. I wonder what else the hon. Member for Stockton, South would like to have before he could consider that the circumstances made it prudent to permit tax cuts.

At the start of our debate, the hon. Member for Dagenham (Mr. Gould) apologised for the absence of his right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley). We have still had no explanation of where his right hon. Friend is, but perhaps that will be vouchsafed before the end of the debate. The apology raised my hopes a little, because I have listened to too many economic debates here in which the right hon. Member for Sparkbrook has opened for the Opposition; and I thought that an hon. Member as widely respected as the hon. Member for Dagenham would perhaps offer the House something a little more worthy of the occasion.

6 pm

I was very disappointed by the hon. Member's speech, which was unworthy of so intelligent a man. The voice was certainly the voice of the hon. Member for Dagenham, but the words sounded to me rather like the words of the right hon. Member for Sparkbrook. [Interruption.] There will be plenty of time before the general election for the hon. Member for Dagenham to decide on his position and see whether he wishes to stay in the same party as the right hon. Member for Sparkbrook. No doubt the hon. Member for Fulham will have been able to think about that too, as will the hon. Member for Sedgefield (Mr. Blair). The hon. Member for Great Grimsby (Mr. Mitchell) may also wish to make his position clear after the election—if he is still a Member of the House.

No amount of evasion or smearing will disguise from the voters the Labour commitment to higher taxation—certainly to higher levels of income tax, and probably to higher levels of other taxes as well. The Labour party cannot disguise from the voters that the higher taxes that it would have to propose would undermine incentives for workers at every level of pay.

One point which has so far largely escaped the attention of those who have spoken is that the amount of resources used in tax cuts this year is very much less than the amount of resources used in the autumn statement to increase public spending last year. The Government's economic decisions over the past year have focused on how to spend the substantially increased resources which the success of their management of the economy has generated. With the economy growing steadily for the fifth or sixth year in succession and with tax revenues rising very rapidly, partly as a result of the additional incentives offered by low tax rates, the Government have been faced with this agreeable choice of whether to increase public spending or cut taxation or do both.

It is in very sharp contrast to the situation ten years ago, when the Labour party was in power and was being propped up by the Liberal party, and when the choice was always whether to cut spending or increase taxation or, if it could invent them, what totally new taxes to impose. We have gone to the opposite extreme: the debate today is about whether we increase spending or cut taxation, and in the past year we have managed to do both. But we have used twice as much money to increase public spending — an almost £5 billion increase in public spending last autumn—as we have used to reduce taxation; and, at the same time, there has been a reduction in the public sector borrowing requirement, a reduction of an amount which again is greater than the cost of the tax cut that we are now debating.

So when it comes to sharing out the resources created by our success in expanding the economy, the lion's share will go to improving the quality and standard of our public services through increased public expenditure. And all that is quite apart from the excellent work done by my right hon. Friend the Chief Secretary in making sure that we get better value for money from the spending that this Government have maintained.

All this — the combination of lower taxes, higher spending and lower borrowing requirement—is itself a very remarkable achievement, given the economic background against which it occurs. If we had listened to Opposition Members 18 months ago, in August 1985, we would have heard them say rather grudgingly that such economic success as we had achieved then was almost entirely due to the income from North sea oil. Our economy was said to be propped up by these North sea oil revenues. But what happened to those revenues after the autumn of 1985? They were reduced by about 50 per cent., with the collapse in the price of oil. One would have expected, if the Opposition assessment of our economic position at the end of 1985 had been accurate, some appalling crisis to hit our economy—a total collapse in sterling, a massive rise in interest rates, leading to huge cuts in public spending. Yet none of that has happened, and we have gone on cutting taxation and increasing spending. The pound is steady — indeed, strong. As a result of that, and of lower public sector borrowing, we are seeing substantial reductions in interest rates.

The income tax cuts are a continuation of a policy which has been followed by this Government steadily since 1979—that of reducing the rate of income tax and also of increasing substantially in real terms the threshold at which the basic rate becomes payable. That is another important aspect of this year's Finance Bill, which rather gives the lie to the criticism of the hon. Member for Fulham, when we see that there is no increase in the thresholds at which the higher rates become payable but that the basic rate threshold has been increased in line with the retail price index.

That comes on top of an increase in real terms, during the life of this Government, of the basic rate threshold of more than 20 per cent. This whole pattern of income tax cuts has been a recognition of the vital importance of incentives — incentives which are now recognised as necessary at all levels of income. This is important at the lower end, because there is no doubt that a married man with two children who is earning perhaps two thirds of average earnings — £120 or £130 a week — is not very much better off after tax and other stoppages at the end of the week than he would be if he were living entirely on social security. The gap between his take-home pay as a full-time wage earner and what he would get if he chose to live on social security is nothing like as wide as we would like it to be.

The way to overcome that problem is not to have a series of massively inflationary wage increases, which would feed through into prices and undermine the considerable gains that we have made in our competitive position. Nor is it to cut the level of social security benefits. The right way to widen the gap between what one earns in work and what one receives by way of social security is to reduce the burden of taxation and, in my view, also to reduce the burden of national insurance contributions which the lower-paid workers have to pay. As I said earlier, the Government two years ago made quite significant reductions in the rate of employees' national insurance contributions. I very much welcome those and hope that consideration will be given in the next Parliament to going further down that route.

The advantage — I am sure that it is one that will impress itself particularly on my right hon. Friend the Chief Secretary — of the cuts in national insurance contributions is that they can be targeted very accurately, now that we have the categories in which people are liable to lower rates of national insurance contribution: it is an extraordinarily cost-effective form of giving tax relief.

It is also important that we go further down the route of reducing employers' national insurance contributions as well, particularly for the people in the lower-paid categories. The accuracy with which money can be targeted in these two ways is greater than anything that can be done by way of income tax. There is no doubt that the changes made in 1985 have helped to stimulate the growth in employment since then.

The fact that there are many jobs in both the service and the manufacturing sectors which command wages at slightly below national average levels, and the fact that it has become cheaper for employers to take on labour for those earning such wages and more worthwhile for individuals to accept such jobs, have undoubtedly contributed to the reduction in unemployment.

I have no doubt that we shall be able to reduce the basic rate of income tax to 25 per cent. before long; indeed, many Conservative Members hope that it will become much lower than that in the lifetime of the next Parliament and the one after that, and during all the decades of happy Conservative Governments to which we look forward. If we can reduce income tax rates sufficiently, we shall completely remove any difficulty relating to thresholds. If tax rates are down to 20 per cent. no one will be too fussed about the precise level at which he starts to pay.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

How will that affect the VAT level?

Photo of Tim Yeo Tim Yeo , South Suffolk

The reduction to 20 per cent. can be achieved as a result of the steady growth in the economy.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

That is what the Government said in 1979.

Photo of Tim Yeo Tim Yeo , South Suffolk

During the present Parliament, rates have come down by 3 per cent. without any increase in VAT. We can all look forward to further cuts in the basic rate and, in due course, in the higher rates.

However, cutting the income tax rate is not the only income tax consideration; the cuts must be accompanied by tax reforms. I believe that, during the next Parliament, we should pay close attention to the ideas floated last year in the Green Paper dealing with the reform of personal taxation. Perhaps, after consultation, it will not be thought appropriate to adopt precisely the suggestions outlined in that document. Nevertheless, there is no doubt that it is very desirable for us to revise the present taxation treatment of married women.

I know that an issue dear to the heart of my hon. Friend the Member for Kensington (Sir B. Rhys Williams) is the merging of income tax and national insurance contributions. Indeed, I hope that he will touch on that subject if he catches your eye, Mr. Armstrong. I entirely share his interest in the matter. To the average wage earner, both contributions are simply stoppages in his pay packet. Few people who have grown up since the welfare state and such benefits as the National Health Service have become part of our culture, and a fixed element in our society, can distinguish between national insurance and income tax payments. I believe that substantial administrative savings could be derived from merging the two; it would also allow a more rational approach to policies and the setting of rates for both tax and national insurance. I hope that, when we proceed with further tax cuts in the next Parliament, we will at the same time give attention to taxation reforms.

6.15 pm

There is one other point that I wish to make about income tax cuts, and I am sorry to say that it is a negative point. One category of organisation in this country loses money as a result of income tax cuts. I refer to charities, which are the unique losers from a policy of switching from direct to indirect taxation. I entirely support the switch that we are making, and I applaud the substantial new tax concessions given to charities by the present Government—not least the payroll giving scheme, which came into force earlier this month. A number of organisations, including the charities VAT and tax reform group, of which I am chairman, are trying actively to promote the scheme, and we all hope that it will be a substantial success.

I welcome the remarks made by several Treasury Ministers and the efforts that they are making to publicise the scheme, for it deserves our support. I hope that before long it will be possible for hon. Members to choose a charity to which they can make donations from their payroll, provided that the Fees Office can make the necessary arrangements.

However, it must be said that a lower basic rate of income tax—we are talking only about the basic rate—reduces the income that charities receive from covenants. The present Government, in the Finance Act 1980, provided a substantial concession on covenants by cutting the period for which they must be taken out to qualify for tax relief from seven to four years. That helped many charities to promote the use of covenants as a form of charitable giving. Covenants have grown in importance, and are now a significant element in the income of many charities. Unfortunately, however, when a cut is made in the basic rate of tax, the amount of tax that the charities recover is directly reduced. As a result of this 2p cut, there will be a reduction running into seven figures for charities — a loss of some millions of pounds from covenant income.

I mention that point, because I hope that my right hon. Friend the Chief Secretary will keep it in mind when he considers the other requests that charities make for relief from VAT. It is not difficult to see that charities are losing income on the one side as a result of the higher rate of taxation, and on the other side are exposed to any extention of the VAT base. During the lifetime of this Parliament, one or two extensions have affected charities. I am grateful to my right hon. Friend the Chancellor for responding this year —and even more so last year—to some of the suggestions made by the charities VAT and tax reform group for VAT concessions. That has been immensely helpful, and the dialogue that the group has had with both Ministers and Customs and Excise officials about VAT problems has also been helpful.

I urge my right hon. Friend to remember that, as he achieves these desirable reductions in the basic rate, one group—the only one in our society —loses money as result. I hope that that loss will be recognised when charities make requests in future years for sympathetic consideration of further concessions.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

Surely the net effect of the various changes will be beneficial to charities. If they can get their act together on the payroll giving scheme, and can persuade employers and employees to participate, the scope for increased revenue is very substantial, and could easily outweigh the net disbenefits through reductions in the standard rate of tax.

Photo of Tim Yeo Tim Yeo , South Suffolk

My hon. Friend is right. The potential effect is there. The charities VAT and tax reform group will be monitoring through its extensive membership of charities how much income is received under the payroll scheme. It will take some time to build up, but after a couple of years we shall have some impression of whether the scheme is taking off. I hope that it will. There is a good chance, but it is not certain. What is certain is that there is an immediate loss of income from covenants. But if we monitor the position and it builds up well, the charities will join the Government in celebrating. If it does not build up as well as we hope, the charities will wish to go back the Treasury and discuss whether the scheme can be improved.

I was glad to note that the maximum amount that individuals can give under the scheme had been increased to £120 a year from the £100 that was in last year's Finance Act. I hope that my right hon. Friend will forgive me when I say that I moved an amendment last year to increase the amount to £120. One of my hon. Friends gave us a learned and careful argument about why it was not desirable. However, I am glad that wiser counsels have subsequently prevailed.

I strongly commend clause 20 to the House. I believe that it is the right policy for the country, and that it will be extremely popular with the voters. I am particularly grateful to Opposition Members for allowing us to have such an extended debate on what seems to me an election-winning issue.

Photo of Matthew Taylor Matthew Taylor Liberal-SDP Alliance Spokesperson (Youth)

Various hon. Members have said that this is a debate about taxation rather than about such issues as education and health. However, we should discuss how the £2·5 billion could best be used and what our constituents are saying that money should be used for. It should also be a debate about prudence. That money could be used for long-term investment in training and in the National Health Service, to ensure that people are properly treated, live longer and are comfortable, through changes in the benefits system. We should debate whether we can prudently spend money on tax cuts when we desperately need to invest in the future of this country.

We should also debate whether it is prudent to make tax cuts on the basis of short-term revenues from North sea oil, the consumer boom and privatisation. None of those factors can be sustained in the longer term, and all are mortgaging our ability to invest in the real priorities.

We could be spending that money on education. Imagine how much could be achieved in education with only a fraction of the £2·5 billion. We should be taking this opportunity to invest in adequate training for our young people.

Despite the Government's training schemes, too many of our young people possess no qualification after they have completed their training; therefore, they cannot obtain jobs. Employers say that they can make use of people who have been trained, so money should be invested in genuine rather than mock training schemes.

There should also be investment in basic educational needs—in providing books and the back-up that is so badly needed for the GCSE. Teachers should be provided with the support and the backing for which they ask, and the Government should ensure that, in areas such as mine, schools no longer have outside toilets that freeze up during the winter, with the result that children have to be sent home instead of being educated. Schools should not have to use Portakabins. In parts of Cornwall they have to be closed and the children sent home because they are dangerous in high winds. These are the alternative priorities that we must discuss.

As for the infrastructure, imagine what a difference it would make if the roads were built that manufacturing industry says it needs if it is to compete effectively. And how much more of a difference it would make than an extra £1 or £2 in the pocket each week if people had a sewerage system that worked. Is it genuinely prudent not to invest in a sewerage system that is decaying and falling apart and that in many areas will soon be more expensive to replace than any Government can conceivably afford within a reasonable period?

There are villages in my constituency that still do not have a sewerage system. In the village of Gorran Haven there is sewage in the streets, yet South West Water does not have the money urgently to rebuild the sewerage system for that village.

The National Health Service urgently needs further investment. Everybody knows that NHS hospitals must be given the money to cope with the increasing demands on their services. My hon. Friend the Member for Stockton, South (Mr. Wrigglesworth) referred to the growing needs of the NHS. We acknowledge that the Government have increased spending on the NHS, but it has not been increased sufficiently to keep pace with the growing demand from an increasingly aging population and to allow the NHS to develop its other services.

We should provide proper support for the creation of jobs that would enable this country to be more competitive. If any hon. Member denies that fact, he has only to come to my constituency. Assisted area status was removed from Truro and St. Austell, and it has led to a haemorrhaging of the manufacturing base in that area. Industry is closing down or moving out. Admittedly, the grants were only marginal but they made all the difference between success and failure.

Enterprise corporations and boards invested in manufacturing industry. The investment was marginal, but it made all the difference between success and failure.

Many jobs were created at a very low cost. With well over 3 million people still unemployed, that is a priority that we should be considering.

As for the taxation system, we should not consider simply cutting the taxes of those who are fortunate enough to pay them because they are in work. Instead, we should review the tax and benefits system. As a person's income increases, he can sometimes lose money. My constituency is a very low wage area. On average, wages are £36 a week lower than in the rest of the country. Families on the dole, with children, could obtain work and earn a living, thinking that they would benefit financially from doing so, whereas they could lose financially. It would be prudent for the future of this country if we invested in such priorities. It is not prudent to have a short-term spend for votes by putting a few pounds a week into people's pockets. It cannot be sustained in the long term.

We have been asked whether the alliance is in favour of cutting or increasing taxes. Yesterday, the Prime Minister was asked in this Chamber whether or not she would increase VAT. She said that no Government could say in advance whether or not they would have to increase taxes. Is it strange therefore that we should adopt a prudent stance too, and look at the circumstances as they are?

Of course we are not in favour of increasing taxation for taxation's sake. If it were prudent and the priorities allowed us to do so, we should cut taxation. If the Chancellor could show that the important points that I have made on education, health and benefits could be put into place without taxation having to be increased, we should welcome it and accept it. However, the Chancellor has not done that. He is cutting taxation without putting these principles into effect and without acting on these priorities. He is not investing prudently in our future. That is why we shall vote against the clause.

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

The hon. Gentleman has referred to the Liberal party's taxation policy. Both sides of the House have asked the Liberal party about its tax policy for the coming year. We have laid out in the Finance Bill precisely what our taxation policy is. Will the hon. Gentleman say what precisely his party would do about tax this year?

Photo of Matthew Taylor Matthew Taylor Liberal-SDP Alliance Spokesperson (Youth)

We shall vote against the clause in the context of the Government's announced spending plans. As for our plans, we have said clearly that, if we can fund our priorities without increasing taxation, naturally we will do so. But if we cannot, we are prepared to increase taxation because we believe that that is the priority for which the people are asking, for which this nation is crying out and which this nation needs.

Photo of Sir Brandon Rhys Williams Sir Brandon Rhys Williams , Kensington 6:30 pm, 29th April 1987

I spoke at some length on Second Reading, so it is not my intention to detain the Committee at great length in this important debate on the standard rate of tax. To some extent, Opposition Members have sought to make this debate a choice between raising the personal rate of tax and reducing it: there has been criticism of my right hon. Friend the Chancellor of the Exchequer for his decision to make a substantial reduction in the basic rate of tax. That is really an artificial debate in view of the buoyancy of the revenue and the ample scope which exists for tax cuts at present. Reductions in taxation are clearly indicated by the health of the British economy, but the Committee has to recognise that we are talking about just one Budget in a series. It is more than likely that my right hon. Friend will introduce another Finance Bill within a few weeks, and certainly before the end of the summer. Therefore, the Committee ought to be taking a long view.

I want to touch on one or two subjects on which I did not go into sufficient detail on Second Reading. How much is a suitable reduction in tax? My right hon. Friend the Chancellor surprised the commentators by making a reduction of only 2p in the pound. His decision was absolutely right. because he took the view that the benefits of the buoyancy of the revenue should be offered back to the public through a reduction in the Government's programme of borrowing on capital account. The prudence of that decision was obvious.

The decision having been made that there should also be a substantial reduction in the level of personal taxation — taxation on current account — it is right that the Committee should look at the ways in which that reduction is applied in the present Budget and should also consider the ways in which further reductions in the pressure of taxation on the public may be dealt with in the future.

In this Budget, my right hon. Friend the Chancellor chose to make a general reduction by making a reduction in the basic rate. Before he comes to his next Budget, I should like him to consider whether there are advantages in making reductions in tax selectively. Obviously, a general reduction in the basic rate is a stimulus to the economy: it simplifies the whole proceeding in the minds of the electorate. But a reduction in the basic rate of tax goes preferentially to single people, because the system we use at present of granting handsome allowances to married couples means that single people have more pounds on which their tax is levied. Therefore, when the basic rate is reduced, single people stand to gain more than people on the same income who are married, and who enjoy the benefit of allowances which exempt a substantial part of their income from taxation.

A reduction in the basic rate of income tax goes to all taxpayers, but it does not directly benefit those who are not in the tax net anyway because their income is below the threshold. I should therefore like my right hon. Friend the Chancellor to consider the possible advantages next time of applying reductions in taxation selectively. There are various ways in which selective reductions in personal taxation might be made.

My hon. Friend the Member for Suffolk, South (Mr. Yeo) dealt with the desirability of tidying up the anomalies of the national insurance system. I have campaigned for a very long time for the end of the national insurance system as it now exists, because it seems to be a ridiculous and unconvincing farce and a time-consuming waste of clerical effort.

I pointed out on Second Reading that the Committee must consider that on account of their national insurance contributions, which for most people in employment are at the rate of 9 per cent., the effective rate of tax on earned income is 36 per cent., whereas on investment income it is to be reduced to 27 per cent. There is something wrong with a tax system that gives substantial advantages to investment income and leaves the rate of tax on the people who create the wealth at a substantially higher rate.

I also draw the attention of my right hon. Friend the Chancellor to what I believe to be the compelling advantages of reducing higher rate tax and indeed of abolishing it altogether. In making reductions in taxation, we should have a very clear idea of the priorities. They must be to create or to improve the incentives to work for the mass of the population, to encourage people to save and to invest, and to relieve need, bearing in mind that workers on low wages with families may still be incurring hardship in spite of the general improvement in standards of living of the population which we can all see and which we all welcome.

Coming back to higher rate tax, we see the way capitalism works in the far east and in other countries where there is not this oppressive and vindictive burden on the people who contribute most to the creation of wealth. It is not sufficient to talk about the reduction in higher rate tax or to congratulate ourselves, as the Government are perfectly entitled to do, on the significant reduction which has already been made in the incidence of higher rate tax. We should declare ourselves determined to abolish this vindictive and unnecessary tax altogether.

It seems to me that, were this move to be made by a Conservative Government, everybody would gain and nobody would lose. Releasing the incentive to work and to invest of the most active elements— the people who are most able to contribute the highest degree of judgment and energy in the creation of wealth—would benefit the economy and must therefore be in the interests of the entire population. We should get rid of this inexcusable and vindictive anomaly.

One could say many things about the redistribution of income which would not be appropriate under this clause. But one ought to consider the possibility of reductions in the impact of tax through the tax allowances. The Green Paper which was floated some months ago on the subject of the taxation of husbands and wives did not arrive at a satisfactory compromise. I do not think it was workable in administrative terms and it would probably have proved costly without achieving the result that we really want—that women should be completely independent an Women should be perfectly free to make their own tax declarations directly to the tax collector without having to declare what their sex or status is. If my right hon. and hon. Friends are nervous about going the whole way to that reform at once, although I think it would be an extremely popular one, why not make a beginning by allowing women to have their own completely separate investment income, unaggregated with the investment income of their husbands?

Child benefit is the amalgamation of the old family allowance and the child tax allowances which were introduced into the income tax system before the end of the 18th century by William Pitt. If we increase child benefit, we are making a reduction in the effective taxation of families, but we are also extending it to the people who are not in the tax net and therefore, by definition, are at the bottom of the income scale. It must be right to give priority to families, if only because of the assistance that we would be giving to incentives. An increase in the rate of child benefit is the cheapest way to improve the incentive to work for people at the low end of the income scale. It is a matter for regret that this aspect is increasingly neglected in the arguments about future reductions in taxation.

For the electorate, the choice is plain. Do the people themselves have the priority? Do the Government consider that a reduction in taxation is important, or is it more important that we place bigger resources in the hands of the gentlemen in Whitehall? Do we continue with prudent expenditure policies, keeping down the necessary burdens on the public by restraining the tendency of Government expenditure; or do we let the bureaucrats start squandering our resources once again? I warmly endorse the Government's general policy. I shall support the vote to maintain the clause as it stands in the Bill, but I trust that my right hon. and hon. Friends will consider my points in framing their policies for the future.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

This governmental obsession with tax cuts equals incentives equals the key to economic regeneration was always one of the more curious aspects of the Government's doubtful philosophy. It was interesting to note that the Chancellor did not claim that the economic revival, on which he prides himself and which he says is the product of his policies as the greatest Chancellor since the right hon. and learned Member for Surrey, East (Sir G. Howe), was due to tax cuts. He said that it was a consequence of Government policies, of which tax cuts were a part, but even in that he was wrong. The type of tax cuts of which the clause is the final triumph—or perhaps for this Parliament, the final solution—has nothing to do with the improvement in economic activity that is occurring.

The philosophy of tax cuts equals incentives was best characterised by Galbraith, who pointed out that the philosophy really argues that the rich are not working hard enough because they do not have enough money. We all know that the poor are not working hard enough because they are overpaid and are not allowed to price themselves into jobs, so the simple solution is to transfer money from the poor to the rich and all will be well. Then incentives will flourish, the economy will blossom, and things will pick up. The solution was as daft and as simple-minded as that.

Before the 1979 election we pointed out that the promise to cut taxation, which is the centrepiece of the Government's campaign, was a distortion and misleading because the Government could not cut taxation—they had either to shift the burden from direct to indirect taxation or to cut services and Government spending in some fashion, which they were not prepared to define. Those two points remain valid in terms of the Chief Secretary's promise to cut the tax rate to 25p in the pound. Implicit in that is a statement that the Government will either cut services and public spending in a way that will be painful for the economy and the people or—I am sure that they will do this—shift the burden from direct to indirect taxation by an increase in VAT and by spreading VAT to a range of commodities that are now zero rated.

I hope that the Chief Secretary will tell us which of those alternatives will be followed if progress is maintained towards a 25p tax rate. Inevitably, it must be one or the other. I see no way in which the dilemma that we posed in 1979 and the promised tax cuts then does not apply to the Chief Secretary's promise of further tax cuts to follow in the clause.

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

Does the hon. Gentleman recognise that the 2p reduction in the basic rate, which we are discussing, is being achieved this year without any increase in indirect taxes?

Photo of Austin Mitchell Austin Mitchell , Great Grimsby 6:45 pm, 29th April 1987

I shall come to what has provided the Chancellor with an opportunity to make that tax cut this year. Any family earning up to 1·5 times average earnings is paying more tax and a higher proportion of income tax than it was in the last year for which the Labour Government were responsible. There has been merely a shift to other forms of taxation rather than genuine tax cuts. That is happening even with this clause.

The Government's philosophy was fallacious. If the tax burden was too high—that was never proved—because the economy was carrying the burden of the tax required by the services, for example, health and education, which the public demanded, which are essential to an advanced industrial economy, and which are better in other countries, the solution was to expand the economy and not to interfere with the economic balance by the transfer of the burden to other forms of taxation. The Government have harmed the economy. A Government who cut their spending automatically cut their revenue, which is what the Government did.

By their policies, especially those pursued from 1979 to 1981 — the nadir of the Government's economic performance, when they inflicted incalculable harm on the economy — they effectively increased the need for taxation. Even the extra revenue from North sea oil was insufficient to prevent the burden of taxation from pressing more heavily on those on average earnings than it did in 1979. Because the Government had closed so much capacity, because they had destroyed so many jobs in manufacturing industry—1·8 million jobs, or 28 per cent. of employment in manufacturing industry—they had to pay out so much to keep those resources idle and people out of work that their economic policy was effectively self-defeating.

Taking account of the 1979 increase in VAT to 15 per cent. the average earner is paying £6·36 more a week in taxation—a higher proportion of his income—than he was under the Labour Government. The same thing is implicit in the Chancellor's commitment. This is part of the hidden agenda, which involves the increase in VAT and the widening of its range. I take it that the pressure for this change arises, in part, from the legal action which the Commissioners initiated against us, and which will be heard in September. It arises also from Lord Cockfield's brazen schemes in the European Community to end zero rating and align the rates in the Community. Implicit in that is the increase in the burden of VAT on every family, because it will mean VAT on food. Yesterday, the Prime Minister declined to say that she said that a responsible Government could not commit themselves to not increasing VAT. yet it is interesting to note that previously she had specifically committed herself to not increasing VAT.

If the right hon. Lady could commit herself quite specifically before—she did it most notably on 12 June 1984—and say to Parliament "We shall not end zero rating on food," why can she not now commit herself in the same honest and honourable way for the Parliament that is to come? Why could she make a commitment for the 1984 Parliament, but be unable to make one in 1987 for the next Parliament? It is because there is an intention, which the Government are not prepared now to avow, to increase VAT and to shift the burden from direct taxation, which the Chief Secretary wants, to indirect taxation. That is the only way in which the Government can get their tax cuts.

The clear reason why the Chancellor is in a position to make tax cuts this year is that he has been forced to accept — he resisted it all the way — a major proposal put forward by the Labour party in 1982 to get the pound down. Although he resisted every fall with increased interest rates, the pound has come down substantially. Since the end of 1982 it has come down by between 20 and 30 per cent. At times it has come down 10 per cent. on the exchange rate estimates in last year's Budget. This has meant an increase in exports, particularly to the American market—incidentally, such exports will be threatened by the fall in the dollar—an increase in economic activity and an increase in corporation tax, which, added to the present credit boom, allows the Chancellor to cut 2p off income tax.

Like so much of the political situation at the moment, it is part of the window-dressing that is accumulating in the Government's window to lure voters. A prime element on display in the show window is 2p off tax and 2p more to follow if the Chief Secretary is still Chief Secretary after the next election. I hope that electors will look, not at the shop window with the somewhat shopsoiled and tarnished array of goodies, but at the creaking, collapsing, groaning building behind it — the building that is the British economy. I hope that the electors will ignore the window and the lights and look at the building. It has not had maintenance or investment. It is creaking, shabby, shoddy and disintegrating. It is a shop in which many rooms are not used because capacity has been closed. Far too many people live in far too inadequate conditions in the cellar—the three quarter society—that the Government have run. That is the reality behind the goods that the Government are shoving into the shop window.

As the Chancellor, in his vainglorious fashion, struts outside the shop trying to tell passers by that it is one of the most successful economies in the world, voters know differently. They can see the reality of the building, the level of unemployment, the shoddy services and the cuts that have had such a serious effect on many aspects of our lives. It points to what the Chancellor should have done with the money that has been devoted in the Budget to tax cuts.

We need to get expansion going at about double the present rate. We are running a half-cock economy. In fact, the half-cock economy is supporting a three quarter society. The fact that the economy is half cocked means that the growth rate is inadequate to bring down the level of unemployment. Even in the 1930s we could manage a growth rate that was almost double the present one. That brought unemployment down in the 1930s. At this level of growth there will be no substantial and sustained fall in unemployment. It will remain to scar the country. That is what the Chancellor should have done with the money that is being devoted to tax cuts.

The Chancellor should have used the money to stimulate investment and to use it for benign and beneficial public purposes such as housing, to expand public spending to stimulate the economy. Every computer model shows that there is a far greater return of jobs and economic stimulus from public spending and using it for investment purposes than from tax cuts.

The Chancellor could have used the money to remedy many of the deficiencies that have been allowed to emerge in the welfare support system. He should have paid it to pensioners and to beneficiaries, particularly the long-term unemployed. That is the best and most effective means of stimulating the economy. They, with no fat to live on, spend money directly and give a more immediate and prompt economic stimulus. That is exactly what the Chancellor should have done, by expanding the housing programme, public sector spending and the benefits available to those who are deprived in the shoddy society that the Government have helped to create. It is a three quarter society, running on the basis of a half-cock economy, managed by a 40 per cent. Government It is not good enough for the country. The clause is not good enough for the Bill. We shall oppose it.

Photo of John Maples John Maples , Lewisham West

Listening to the speeches made by the hon. Members for Great Grimsby (Mr. Mitchell) and for Dagenham (Mr. Gould), one would think that the Chancellor had devoted all the fiscal resources at his command over the past six months to tax cuts. In fact he has not. In the autumn, he announced a nearly £5 billion increase in public expenditure. In his Budget, in which he had another £5.5 billion, £3 billion came off the PSBR, which has led directly to the lower interest rates that we now enjoy. The sum of £2·5 billion went to tax cuts. So £2·5 billion out of £10·5 billion was devoted to that purpose.

I welcome my right hon. Friend's decision to devote what he has given to income tax cuts to cutting the basic rate. The argument about the basic rate and thresholds has now been resolved quite definitely. In the incentives argument, tax on the marginal pound is important. In the context of the poverty trap, the proposed changes in social security arrangements on which payments will be based after tax income obviously make the tax rate irrelevant.

My right hon. Friend has made the right decision to cut the basic rate of tax. Perhaps the only argument against it is that raising the threshold will benefit the lower paid more. That is undoubtedly true. The difference is fairly marginal. The best way in which to benefit and help the lower paid is to reduce the employee's national insurance contribution to a lower level. That can be done inexpensively and targeted at a particular group. I am sorry that my right hon. Friend considered that he was not able to do that. I hope that if he continues the policy of cutting the basic rate of tax he will raise the threshold on the employee's national insurance contributions to help the low paid.

One of the canards that has to be nailed finally is that lower tax rates lead to lower tax revenue. They do not. The argument about higher rates of tax and what happens to the higher paid is definitely answered by what happened to the yield from higher rate tax. Over the past eight years, it has risen by 40 per cent. in real terms. That was during a period when tax rates have been cut. That seems to bear out what we have been arguing all along: that up to a point —obviously, only up to a point — cuts in tax rates increase yield. In the case of higher rate tax, over the period when the top rate has been cut from 83 per cent. to 60 per cent., the yield rose 40 per cent. in real terms. In cash terms, it has risen from £800 million to £2·2 billion. Adjusted for inflation, that is 40 per cent. That seems to be a fairly definitive exposition of the argument that lowering rates will increase yield.

It is interesting also to note that those who pay high rates of tax are contributing not only more in real terms but a higher percentage of income tax yield than they were eight years ago. In fact, the percentage has gone up from 4·3 per cent. to 5·7 per cent. as the yield from higher rate tax. The share of income tax paid by the top 5 and 10 per cent. of income tax payers has also risen. Cutting tax rates benefits not only the rich; it benefits everybody by generating more tax revenue.

The other point about higher rate tax that must be noted is that not many people pay the higher rate. They do not have a great deal of income in excess of that rate. There are about 190,000 higher rate taxpayers. In answer to a parliamentary question, the Treasury said that the total income in excess of £30,000 a year for those people is £3·5 billion. In order to raise the £3·5 billion that the Opposition are talking about raising from the higher paid they will have to take every pound in excess of £30,000 a year. Opposition Members nod their heads. It is a fact. It is the answer to a parliamentary question. If they want to raise £3·5 billion, they will have to tax at 100 per cent. every pound of earnings in excess of £30,000 a year. I suggest that that is a policy of pure envy. It contains no economic sense and makes no sense in terms of tax yields.

Photo of Nick Raynsford Nick Raynsford , Fulham

The hon. Gentleman has made the same mistake that I criticised earlier when other Conservative Members spoke. He is confusing the total yield from taxation with income tax alone. Our recovery of £3·5 billion will not come solely from income tax. Like his colleagues, the hon. Gentleman has clearly failed to grasp that point.

7 pm

Photo of John Maples John Maples , Lewisham West

From the speeches made by Opposition Members, I understood that they intended to recoup—as they put it—the £3·5 billion that has been given away in tax cuts to the rich. Tax cuts in favour of the rich—as opposed to cuts for everyone—can only be argued in the context of income tax. My point is that there is very little income in excess of £30,000 a year to be taxed.

I also want to consider the argument that people are worse off and that taxation has risen. It is statistically true that tax as a percentage of GDP has risen. As my right hon. Friend the Chancellor explained in his speech, that happened mainly in the first two years, from 1979 to 1981; but it has not happened since. Most citizens are more interested to know what has happened to their real disposable income—their take-home pay. In real terms, for someone on half average earnings, tax has risen from £87 to £100; for someone on three quarters of average earnings, it has risen from £115 to £134; and for someone on average earnings, it has risen from £142 to £166. Those taxes more than cover the increase in VAT. The truth is that almost everybody—whether they are earning half, three quarters, average or twice average earnings—have a greater disposable income now than eight years ago by a considerable amount, and they know it.

Photo of John Maples John Maples , Lewisham West

No, in real terms. In real terms, the take-home pay of people on half, three quarters or average earnings has risen substantially. The hon. Member for Great Grimsby tables hundreds of parliamentary questions. He should read the answers to one or two other questions and he might find more information.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

I understand the answers, which is more than the hon. Gentleman does.

Photo of John Maples John Maples , Lewisham West

If we consider the matter in percentage terms, the real disposable income for someone on average earnings has risen by 2·2 per cent. a year over the past eight years. That is the real test of what has been happening in the economy.

I asked the hon. Member for Dagenham what the consequences of the previous Labour Government's tax rates would be if they were indexed to the present day. He declined to answer. I was not surprised, because the answer is rather unattractive. However, as he declined to answer, I thought that I would do the arithmetic. The answer to my question is the best guide to what a Labour Government would do with income tax. The Opposition declined to answer my question.

Photo of John Maples John Maples , Lewisham West

The hon. Member for Dagenham may not have noticed, but an election is coming. Our tax policy is perfectly clear. However, the electorate are not at all clear about Labour party tax policies.

Photo of John Maples John Maples , Lewisham West

I am talking about income tax. A reasonably good guide to the Labour party's tax policy might be its policy in 1978–79. If we index the tax bands and the married man's threshold—or the married man's allowance, as it was in 1978–79—that allowance would now be £3,245.

Photo of John Maples John Maples , Lewisham West

The hon. Member for Great Grimsby should listen for a minute. He does an awful lot of talking. Under the present Government the married man's threshold is £3,795—an increase of £550. If we index the rate bands, the story is the same. I have calculated the income tax payable on various incomes under the Labour Government's tax rates in 1978–79 indexed to today and compared those to the present rates. Someone earning £5,000 is now paying £325 in income tax. He would have been paying £438 — £113 more — under the Labour Government's rates. Someone earning £7,500, who is paying £1,000, would have been—

Photo of John Maples John Maples , Lewisham West

I am talking about income tax. I wish that the hon. Member for Fulham (Mr. Raynsford) would listen for a moment.

Someone earning £7,500 a year, who is paying £1,000 in income tax, would have been paying £1,250 under Labour's rates. Someone earning £10,000 — which is about average male earnings—would be paying £2,075. He is now paying £1,675. That is a difference of £400 a year, and that is close to the figure that I suggested to the hon. Member for Dagenham in my intervention earlier.

It is perfectly clear, from any way in which we consider the matter, that under a Labour Government everyone would pay more income tax. The best guide to that claim is to he found in the rates that applied when Labour was last in office. When we index those rates, we find that everyone would pay more tax.

I am delighted to support the clause. My right hon. Friend the Chancellor has made the right decision to cut the basic rate. When the Government are returned, I look forward to seeing the basic rate cut to 25 per cent.—and I hope in due course to see it cut even more. From the way in which Opposition Members have spoken and intend to vote, it is clear that the Labour, Liberal and Social Democrat parties are the parties of higher income tax. The Conservative party is the party of lower income tax. The interesting point is that the cut has been made at the same time as public expenditure has been increased. That may appear to be a paradox for Opposition Members, but it is the enviable consequence of a well managed economy.

Photo of Tony Blair Tony Blair , Sedgefield

This debate goes to the heart of the differences between the main parties. The Government want tax cuts, and the Opposition say that the money available should be spent on a range of targeted public expenditure measures which we claim will improve public services and reduce unemployment.

Before dealing with that point I want to correct an assertion by the Chancellor of the Exchequer about the comments made by my hon. Friend the Member for Dagenham (Mr. Gould) about value added tax. The Chancellor claimed that the Government's position on VAT, and especially on extending VAT to food and other materials, had not changed. I want to show why that claim cannot be sustained and that the Government's position has changed.

Three years ago, when we were approaching the Euro elections, in June 1984, the Prime Minister gave a categorical assurance in the House that there would be no VAT on food. She made that assertion in terms that admitted of absolutely no qualification. She replied to a question from one of her hon. Friends and said that the Government had no intention of extending VAT to food. That statement was made without qualification or hedging words.

Much has happened since then. Principally, moves are afoot in the EEC for what is called the harmonisation of internal tax rates. My hon. Friend the Member for Dagenham put the case for the Government's frontdoor imposition of VAT. I want to put the case for the Government's backdoor imposition of VAT through the EEC.

After Lord Cockfield was appointed an article appeared in the Financial Times which stated unequivocally that it was Lord Cockfield's belief that VAT rates must be harmonised within the European Community. In that article, on 25 June 1986, the Financial Times correspondent stated that the issue that was probably closest to Lord Cockfield's heart was The need for bringing indirect tax rates broadly into line. The appointment of Lord Cockfield was followed by a document issued by the European Commission. In unequivocal terms that document stated: Food products, subject to zero-rate VAT in Ireland and the United Kingdom, present a particular problem which should be tackled. That statement appeared in the document entitled, "Towards a Europe without Frontiers: The approximation of European tax systems", which was issued in May 1986.

That was followed by a letter from Lord Cock field to the President of the EEC in May 1986, which was published as part of a consultative document by the EEC. In that letter Lord Cockfield said that it was likely that the Council would resume the examination of proposals already before it on the harmonisation of excise duty structures. That was followed by another document from the EEC, published on 20 January 1987, which set out a rolling programme for tax harmonisation within the EEC, which included harmonisation of VAT. Studies are still continuing within the EEC on harmonisation.

Our attention was caught by an article in the Daily Telegraph on 31 March 1987. The article did not appear in Labour Weekly, the Morning Star or the Daily Mirror. It appeared in the Daily Telegraph. The article was headlined: VAT threat to child clothes food and fuel. In that article, the Daily Telegraph correspondent in Brussels stated: Books, magazines, fuel, children's clothes and all food sold in Britain would become liable to VAT if proposals to be presented shortly by the Common Market Commission are approved by the 12 EEC governments. The Prime Minister followed that by a letter to Alf Lomas, a Member of the European Parliament, in which she said that the Government had not so far been convinced that the harmonisation proposal should proceed. Yesterday, when the Prime Minister was asked a question about VAT, she gave a very different answer from the one that she gave in June 1984. [Interuption.] This is relevant to the point that the Chancellor made. If the Chancellor is entitled to make points about VAT scares put about by Labour, we are entitled to answer those points.

The Prime Minister did not say yesterday what she said in June 1984, that the Government have no intention of putting VAT on food. The right hon. Lady said: There is no way in which a Government of any political colour can say that they will never increase either value added tax or income tax."—[Official Report, 28 April 1987; Vol. 115, c. 158.] That is a much more qualified statement than the statement made in June 1984. The dodging by the Prime Minister yesterday and the Chancellor today entitles us as a party to keep raising the issue of VAT until we get the firm assurance that the Government will exercise their veto on any VAT proposals that come from the EEC. Until we get that assurance, we will continue to press the Government on the VAT issue.

The clause raises the issue of priorities. The Government have said that because of the priorities lacing the country they should, through income tax cuts, put £3 per week into the pocket of the person on average earnings. We say that that is the wrong priority. If that money is available to spend, why not spend it to provide better education, hospitals, transport and other services? The issue is not how much is being spent here and there; it is how much should be spent to provide the types of services that people want. I have found, not just in my constituency, but in other constituencies, that people understand the language of priorities and that it is better for their long-term future to spend this money to build up and safeguard their long-term interests.

We were told by the alliance Member, in an interesting series of interventions, that they could not be sure exactly what their policy on tax cuts would be. It is time that we got some straight answers to the questions that we have been putting to the alliance about its income tax policy. The Government have made their position clear and the official Opposition have made their position clear. The hon. Member for Stockton, South (Mr. Wrigglesworth) said that the alliance would make clear before the general election campaign exactly where they stand on reversing, or not reversing, tax cuts. The hon. Member for Truro (Mr. Taylor) adopted a different position and said that the alliance would look at the position when it got into power. That is the hedging and dodging that we have come to know from the alliance.

We know that the position in the four or five weeks run up to the general election will not be materially different from what it is now, so we are entitled to have the campaign issues put fairly and squarely before the British people. We are entitled to know where the alliance stands. Until it makes it clear where it stands, it does not deserve to be treated with credibility.

We had the usual eulogy for the economy from the Chancellor. He took a side swipe — I thought rather unfairly—at the excellent Treasury study on the effect of taxation incentives on employment.

Photo of Tony Blair Tony Blair , Sedgefield

I have read it. It is wrong of the right hon. Gentleman to commission a report and then dismiss it simply because he does not like the findings. Perhaps the professor who wrote the report has been consigned to the same status as the bishops in Conservative propaganda, but I should have thought that the right hon. Gentleman would treat him with a little more circumspection.

The Chancellor, in his analysis of the economy, refused to deal with the point that he once raised in a speech about the City, that is, the short term-ism of Government economic policy. The Government's Red Book, which was published at the same time as the Budget, shows the underlying danger to the economy from the consumer boom getting out of control and causing high interest rates, which are still high even after the cuts yesterday. The Chancellor felt that he had to cut borrowing to deal with the consumer boom, because at the same time he cut taxes. The worst thing that we can do, when we have a consumer boom and high interest rates, is to cut taxes and fuel the consumer boom to a greater extent.

7.15 pm

The Chancellor talked about the real economy and output. I asked the House of Commons Library to give me the output figures for all EEC countries over the seven years of the Government's term of office. I assume that we are entitled to talk about the Goverment as if they were in power from 1979 to 1981. The table, which compares Britain's record with the records of other EEC countries from 1979 to 1986, shows a staggering picture of our relative failure. All the other EEC countries, except France, which shows a 1 per cent. fall in output over the seven years, show an increase in manufacturing output. Britain is at the bottom of the table by miles, with a fall of almost 7 per cent. in that period. The countries that have overtaken us are not just Germany or Italy. The Netherlands increased its manufacturing output by 12 per cent.; Luxembourg increased its output by 22 per cent.; Portugal increased its output by almost 37 per cent.; and Ireland increased its output by almost 33 per cent. That shows how far we have been relegated down the manufacturing output table.

The Chancellor talked about how well the Government are doing with new industries. We should look at the figures on the new technology industries, not on the traditional industries, to see how well we are doing there. Almost all those new industries are in deficit. The Government have failed, not just to save traditional industries, but to create new industries.

The hon. Member for Vale of Glamorgan (Sir R. Gower) referred to the textile industry. The textile industry shows a deficit of almost £3 billion. That is the last available figure, so the notion that the Government are a Government of progress and innovation in the economy does not stand up to a moment's analysis.

Government Members have several times muttered comments from a sedentary position about the CBI trend survey, published today. I have not had the opportunity of studying it in as much detail as I should want. I am sure that it has nothing to do with the impending general election, but a similar survey was published in 1983. If one looks at the detail of that CBI trend survey, some interesting things emerge in the difficulties that the country faces. It is true that the overall picture is more optimistic, but it is interesting that optimism is most prominent in the areas of the economy in which there is a degree of depression.

The fastest-growing area of manufacturing is the chemicals and intermediate goods sector. The second is the consumer goods sector. The lowest—lowest by a long way—is the capital goods sector—electrical, mechanical, machine goods, and so on. In other words, where there is high value added to British goods, British industry is not doing as well as it should be. Where it is doing well is in the low value added sectors, which, to a large extent, is the result of the exchange rate fall last year, because it is those sectors that are most sensitive to the exchange rate.

The CBI trend survey says about capital goods that order books are shortening, that fewer than 20 per cent. are investing to increase capacity rather than simply investing to increase efficiency, and the majority, 86 per cent., say that the major constraint on expansion is shortage of sales, orders and demand. When we are looking at the real economy, we should take some of those matters into account.

The truth about the Government, which has been shown time and again throughout this and other debates on the economy, is that when it comes to choosing the high unemployment option, they are prepared to do so. That is the central difference between the two sides of the Committee. We live now in a kingdom divided along every conceivable type of line—between the poor and the rich, the north and the south, those with private health insurance and those with public health insurance, those who have shares and those who do not have shares. This is a Government who live and thrive on social division. It is that social division that lies at the heart of the clause, and it is because we believe in healing the social divisions in Britain that we shall vote against it tonight.

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

The hon. Member for Dagenham (Mr. Gould) was struggling today as much as his party is struggling in the country. I recognise that many of his energies are being directed elsewhere, but his material was remarkably thin.

"Remarkably thin" is also an apt description of the attendance on the Opposition Benches today. There were only three on the Opposition Front Bench and one on the Back Benches until the last few minutes—indeed the last few seconds.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

The Chief Secretary must not be allowed to get away with that. There were long periods during the debate—I do not know whether he was present—when the Conservative Benches were no more heavily populated than the Opposition Benches.

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

I have been present throughout the debate, and there were a lot more Members on the Conservative Benches.

We are told, as the hon. Member for Sedgefield (Mr. Blair) has just said, that the clause is at the heart of the matter for the Opposition. We have made it clear throughout that clause 20 and what it does to income tax is extremely important for our economic policies, and is perhaps the most important part of the Budget. But it was the Opposition who wanted the debate today in order to highlight that the clause was, in their terms, at the heart of the matter. Therefore, it is extraordinary that, throughout, practically nobody has been here.

Indeed, the hon. Member for Great Grimsby (Mr. Mitchell) had once again to pop from the Front Bench to the Back Benches to make his speech. I always find his speeches entertaining, and I always enjoy it when he does so. He is good at creating phrases, but the economic analyses and policies behind them are woefully thin. He has recently been popping from the Front Bench to the Back Benches in another sense—or perhaps not—in an alternative manifesto which we have recently had in the minority report of the Treasury and Civil Service Select Committee.

The hon. Gentleman is playing a key part in the Labour party's economic policies, and he has strongly put forward his arguments today from the Back Benches, although he is now again on the Front Bench. It is interesting to look at some of the ingredients of that alternative manifesto—a return to the policies pursued by the last Labour Government between 1974 and 1976, before they had to be bailed out by the IMF; massive and inflationary expansion of the money supply; mainstream corporation tax and advance corporation tax to be raised to 52 per cent.

Those policies are the last thing that industry and commerce in general want. They are the last thing that would keep our economy competitive and bring down unemployment. We would not have had the optimistic CBI survey this week if those policies had been followed during the past few years.

Let me return to the thin attendance. All the Opposition Members who are now on the Back Benches will not have heard the Chancellor commenting on a letter that he recently received from the Leader of the Opposition. Since this was supposed to be such a keynote debate, the poor attendance is an interesting reflection. The Leader of the Opposition says to the Chancellor: Our campaign will be stunning. If it is to be as stunning as the Opposition attack today, it is no wonder that Opposition Members were not here. They were clearly so stunned that they were flat on their backs elsewhere.

There is one other phrase that I want to pick out from the letter. Perhaps the Leader of the Opposition gave the game away rather more than he realised when, in his letter to the Chancellor, he said: I need even more help from you. I notice how the hon. Member for Dagenham kept off Labour policies today and concentrated on whether we had or had not cut taxes enough. No wonder. The Labour party's campaign might he rather more stunning if he were prepared to accept that it is our policies that are economically successful. That may well explain why he kept right off the stunning policies that we expected to hear from the Opposition today.

I was puzzled at the line that the hon. Gentleman pursued today. He was clutching at straws when he tried to make the main thrust of his attack our record on taxes and then spent much of his speech, which was well below his usual standard, on a tiny piece of academic research concerned with technical and forecasting matters. I came to the conclusion that the hon. Gentleman composed his speech today either because he is so sensitive to the fact that bringing taxes down receives a popular and economically positive response or because he is so keen to divert attention from the Labour party's tax policies.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

To which piece of academic research is the right hon. Gentleman referring? Is he referring to the Brown report on incentives or the mysterious study on the extension of VAT? If it was the latter, can he tell us a little more about it? Can he tell us what the Chancellor would not tell us? What were the terms of reference of that study, what conclusions did it reach, when were those conclusions produced and what action do the Government propose to take on them?

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

The terms of reference are known. They are to examine the detailed relationships between VAT yield and consumer expenditure. The purpose is to try to improve the understanding of the relationships between expenditure and VAT and to improve forecasting. It has nothing whatever to do with the details of any policy on VAT. The results have not yet been reached and no action will follow from them.

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

The Chief Secretary poses us a puzzle. If the results have not yet been reached, how can he know that no action will be taken?

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

I have explained that this is a small piece of technical economic research, of a kind that is frequently undertaken. That the hon. Gentleman should believe that it has any significance shows how thin is the Opposition's attack. It is extraordinary. The hon. Gentleman asked me for the answers and he has got them. He now knows how little there is in the point that lie is making—nothing.

The hon. Gentleman also gave the game away when he kept describing our fiscal policies as tax cuts. That shows that he accepts that for some years now we have been doing just that. If the best that he can do is say that we have not done enough yet in reducing the burden of tax, I can tell him that we will, and we know that he will not. Not only will the Labour party not, but it is clear from today's debate, as from so much else that has been said, that it will put up taxes much higher than they were under the last Labour Government.

That is why I find the hon. Gentleman's attack today so extraordinary. He has tried to demonstrate that we have not yet succeeded sufficiently in bringing taxes down. That is a recognition of the policies that we are pursuing. It seemed almost by implication to suggest that we were right to say that we know perfectly well that the policies of the Labour party would substantially raise taxes. That makes the charge of the hon. Member for Dagenham extraordinary.

I shall deal with some of the hon. Gentleman's points on the tax record and make the record on income tax clear. Everyone will pay less income tax in this fiscal year than under the income tax regime of the Labour Government when they left office — the 1978–79 regime — if it had been indexed in the proper way. A married man on average earnings would pay £10·50 a week more in income tax under an indexed 1978–79 regime. Moreover, the proportion of income tax and national insurance contributions is lower for everyone compared with the indexed regime of 1978–79.

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury 7:30 pm, 29th April 1987

It is no good the hon. Member for Fulham (Mr. Raynsford) making that ludicrous point. It is our objective to continue to get income tax down and the burden of taxes down. We know that a Labour Government would substantially raise the burden of taxation for everyone. His is a totally bogus point.

Photo of Nick Raynsford Nick Raynsford , Fulham

Perhaps the Chief Secretary will answer the specific point that I made—that a household in low-paid employment paying tax and national insurance and receiving rent and rate rebates would have lost 62p in the pound in 1979 for every pound earned. Under this Government, even after the 27p tax rate has been put into effect, the household now loses 82p in the pound and next year will lose 87p.

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

That is a good deal better than the 100 per cent. marginal tax rates that there previously were in many areas. That is a consequence of targeting benefits on the poorest. Reversing this income tax cut would make the situation worse.

The more important point is to ask what the hon. Member for Dagenham would do. He would greatly increase the burden of taxation compared with what it is now, on everyone. That is what makes such a nonsense of the position that the Labour party has been taking today.

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

I shall complete this point. Referring back to the indexed 1978–79 regime, a married man without children on half average earnings—about £113 a week — will pay 9·72 per cent. of his earnings in income tax in 1987–88, compared with 12·9 per cent. if the regime that we inherited had simply been indexed.

My hon. Friend the Member for Lewisham, West (Mr. Maples) was right — what matters to individuals and their families is real take-home pay. For those on average earnings, real take-home pay will be over 21 per cent. higher in real terms in 1987–88 than in 1978–79. The real take-home pay of married men without children on average earnings fell under the last Labour Government.

The hon. Member for Fulham mentioned nurses. He heard my right hon. Friend the Chancellor say that nurses' real take-home pay had gone up 42 per cent. under the Government. Real take-home pay has been transformed compared with the performance of the Labour Government. The hon. Member for Dagenham talked about mismanagement of the economy. What better comparative example of mismanagement under the former Labour Government and successful management under this Government is there than that?

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

I cannot give way.

I want to respond briefly to the point on regressive taxation. It is interesting that the top 5 per cent. of taxpayers—which is what I imagine the Opposition had in mind when they made this change—now pay some 28 per cent. of the total income tax yield, compared with 24 per cent. in 1978–79. That underlines my hon. Friend's argument that reductions in tax encourage greater effort and often improve yield.

My hon. Friend the Member for Kensington (Sir B. Rhys Williams) said that we must look at international tax rates when we are considering the rates of tax on the higher paid. He urged the Government to do more than we have, because in this Finance Bill we have consciously directed our tax proposals at those on average earnings and all those for whom the basic rate is the marginal rate. I am sure that my hon. Friend will agree that when we first took office it was right to get rid of the absurdly high levels of direct taxation that the higher paid faced under the last Government.

It is a ludicrous charge for the Opposition to make that we have not succeeded enough in our tax objectives when we are committed to a basic rate of 25p and they are committed to further massive increases. However, those are only their intermediate proposals. As the hon. Member for Dagenham knows, I have itemised the recent spending pledges that Labour Front Bench spokesmen and their party conferences have made. There have been no denials on any of them; I have the list here and I have itemised pledges with the date and the person who made them. Those spending pledges would lead to a massive increase in taxation.

I want to ask the hon. Member for Dagenham a question. We have been concentrating on the basic rate of income tax. As he will know, what goes with that are the reduction in the small business corporation rate of tax, which has now come down by 15p in the pound, and the reduced rates of tax on unincorporated businesses and the self-employed by another 2p. Is he saying that he would increase the rates of taxation on those businesses by another 2p if he ever had the opportunity to introduce a Finance Bill?

Photo of Mr Bryan Gould Mr Bryan Gould , Dagenham

We have always made it perfectly clear that the £2·5 billion which has been given away in the Budget would be recouped, not necessarily in exactly the same form, and that that money would be spent on investment rather than consumption.

Photo of Mr John MacGregor Mr John MacGregor The Chief Secretary to the Treasury

That clearly means that the rate of tax for the unincorporated and self-employed would increase, and I am sure that the country will be interested to know that.

The hon. Member for Stockton, South (Mr. Wrigglesworth) said that, in a few weeks, he would tell us what the cost of the alliance programme was to be and what it would do about income tax. I do not know when the election will be, but I thought that my hon. Friend the Member for Suffolk, South (Mr. Yeo) made a very fair point when he said that the leader of the SDP had firmly predicted that the election would be on 7 May. If that were the case, presumably the hon. Member for Stockton, South has already costed his proposals and decided what he will do about the rate of income tax. If not, it is clearly a case of cobbling up a policy at the last second, which does not seem to be untypical of his party.

I am told that, at a recent farming conference, the SDP spokesman was challenged as to what the alliance would do on the rating of agricultural land, and when it was pointed out by the chairman that the two parties in the alliance were saying different things, the spokesman said that that was the value of having two policies at one and the same time. He said, "We can choose which one we want at the time." That is typical of the hon. Member for Stockton, South and all that he has said today.

I have been through the lengthy document, "The Time Has Conic". There is not a specific pledge in it, but there is a vague pledge of doing something nice and worthwhile for any group to which the hon. Gentleman wants to appeal. That is typical of his party and typical of what it will do in a moment. It will vote against clause 20 and at some time it will make up its mind as to what it will do. At least on this point the Labour party is much more honest and straightforward. It has said what it will do, but once again the hon. Member for Stockton, South and the alliance want to have it all ways.

Many interesting points were made by my hon. Friends to which I will not reply because the Committee wants to come to a conclusion on clause 20.

In his opening remarks, and again in his last intervention to me, the hon. Member for Dagenham got to the heart of the matter—to use the phrase used by the hon. Member for Sedgefield (Mr. Blair)—when he talked about my right hon. Friend the Chancellor "giving away" money in tax cuts. He used that phrase twice and in doing so gave away the Labour mentality. We believe that the tax cuts are giving back to the British people money that they have earned.

I am grateful for the support of my hon. Friends in this debate, not only because they have so effectively exposed the smears of the Labour party about our record, but because they have underlined the benefit of, and reason for, our tax policy, so well epitomised in this clause. That is why I urge the Committee to support it.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 257, Noes 156.

Division No. 149][7.40 pm
AYES
Aitken, JonathanAtkins, Rt Hon Sir H.
Alexander, RichardAtkins, Robert (South Ribble)
Alison, Rt Hon MichaelAtkinson, David (B'm'th E)
Amess, DavidBaker, Nicholas (Dorset N)
Ancram, MichaelBaldry, Tony
Ashby, DavidBanks, Robert (Harrogate)
Aspinwall, JackBatiste, Spencer
Bellingham, HenryGriffiths, Peter (Portsm'th N)
Bendall, VivianGrist, Ian
Bevan, David GilroyGround, Patrick
Biggs-Davison, Sir JohnHamilton, Hon A. (Epsom)
Blackburn, JohnHamilton, Neil (Tatton)
Blaker, Rt Hon Sir PeterHampson, Dr Keith
Body, Sir RichardHanley, Jeremy
Bonsor, Sir NicholasHannam, John
Boscawen, Hon RobertHarris, David
Bottomley, PeterHarvey, Robert
Bowden, A. (Brighton K'to'n)Haselhurst, Alan
Bowden, Gerald (Dulwich)Hawkins, C. (High Peak)
Boyson, Dr RhodesHawksley, Warren
Braine, Rt Hon Sir BernardHayes, J.
Brandon-Bravo, MartinHayward, Robert
Bright, GrahamHeathcoat-Amory, David
Brinton, TimHeddle, John
Brittan, Rt Hon LeonHenderson, Barry
Brooke, Hon PeterHickmet, Richard
Browne, JohnHind, Kenneth
Bruinvels, PeterHirst, Michael
Buck, Sir AntonyHogg, Hon Douglas (Gr'th'm)
Budgen, NickHolland, Sir Philip (Gedling)
Bulmer, EsmondHoward, Michael
Burt, AlistairHowarth, Alan (Stratf''d-on-A)
Butcher, JohnHowarth, Gerald (Cannock)
Butler, Rt Hon Sir AdamHowell, Ralph (Norfolk, N)
Butterfill, JohnHubbard-Miles, Peter
Carlisle, John (Luton N)Hunt, David (Wirral W)
Carlisle, Kenneth (Lincoln)Irving, Charles
Carlisle, Rt Hon M. (W'ton S)Jackson, Robert
Carttiss, MichaelJenkin, Rt Hon Patrick
Cash, WilliamJohnson Smith, Sir Geoffrey
Channon, Rt Hon PaulJones, Gwilym (Cardiff N)
Chapman, SydneyJones, Robert (Herts W)
Chope, ChristopherJopling, Rt Hon Michael
Churchill, W. S.Joseph, Rt Hon Sir Keith
Clark, Hon A. (Plym'th S'n)Kellett-Bowman, Mrs Elaine
Clark, Dr Michael (Rochford)King, Roger (B'ham N'field)
Clark, Sir W. (Croydon S)King, Rt Hon Tom
Clegg, Sir WalterKnight, Greg (Derby N)
Cockeram, EricKnight, Dame Jill (Edgbaston)
Coombs, SimonKnowles, Michael
Cope, JohnLamont, Rt Hon Norman
Cormack, PatrickLang, Ian
Couchman, JamesLatham, Michael
Critchley, JulianLawler, Geoffrey
Currie, Mrs EdwinaLawrence, Ivan
Dickens, GeoffreyLawson, Rt Hon Nigel
Dicks, TerryLee, John (Pendle)
Douglas-Hamilton, Lord J.Leigh, Edward (Gainsbor'gh)
Dover, DenLester, Jim
Durant, TonyLewis, Sir Kenneth (Stamf'd)
Edwards, Rt Hon N. (P'broke)Lightbown, David
Evennett, DavidLilley, Peter
Fallon, MichaelLloyd, Sir Ian (Havant)
Farr, Sir JohnLloyd, Peter (Fareham)
Favell, AnthonyLord, Michael
Fenner, Dame Peggy Lyell, Nicholas
Fletcher, Sir AlexanderMcCrindle, Robert
Forman, NigelMcCurley, Mrs Anna
Forsyth, Michael (Stirling)Macfarlane, Neil
Forth, EricMacGregor, Rt Hon John
Fowler, Rt Hon NormanMacKay, Andrew (Berkshire)
Franks, CecilMacKay, John (Argyll & Bute)
Fraser, Peter (Angus East)Maclean, David John
Freeman, RogerMcLoughlin, Patrick
Fry, PeterMcNair-Wilson, M. (N'bury)
Gale, RogerMadel David
Galley, RoyMajor, John
Gardner, Sir Edward (Fylde)Malins, Humfrey
Garel-Jones, TristanMalone, Gerald
Glyn, Dr AlanMaples, John
Goodhart, Sir PhilipMarlow, Antony
Gorst, JohnMarshall, Michael (Arundel)
Gow, IanMather, Sir Carol
Gower, Sir RaymondMaude, Hon Francis
Greenway, HarryMaxwell-Hyslop, Robin
Gregory, ConalMay hew, Sir Patrick
Griffiths, Sir EldonMerchant, Piers
Mills, Sir Peter (West Devon)Skeet, Sir Trevor
Mitchell, David (Hants NW)Smith, Tim (Beaconsfield)
Moate, RogerSpeller, Tony
Monro, Sir HectorSpicer, Jim (Dorset W)
Montgomery, Sir FergusSquire, Robin
Moore, Rt Hon JohnSteen, Anthony
Morris, M. (N'hampton S)Stern, Michael
Moynihan, Hon C.Stevens, Lewis (Nuneaton)
Mudd, DavidStewart, Allan (Eastwood)
Nelson, AnthonyStewart, Andrew (Sherwood)
Newton, TonyStewart, Ian (Hertf'dshire N)
Nicholls, PatrickStradling Thomas, Sir John
Norris, StevenSumberg, David
Onslow, CranleyTaylor, John (Solihull)
Osborn, Sir JohnThatcher, Rt Hon Mrs M.
Ottaway, RichardThornton, Malcolm
Page, Sir John (Harrow W)Thurnham, Peter
Page, Richard (Herts SW)Townsend, Cyril D. (B'heath)
Patten, J. (Oxf W & Abgdn)Tracey, Richard
Pattie, Rt Hon Geoffreyvan Straubenzee, Sir W.
Pawsey, JamesVaughan, Sir Gerard
Percival, Rt Hon Sir IanWaddington, Rt Hon David
Pollock, AlexanderWakeham, Rt Hon John
Porter, BarryWaldegrave, Hon William
Portillo, MichaelWalden, George
Powell, William (Corby)Walker, Rt Hon P. (W'cester)
Powley, JohnWaller, Gary
Price, Sir DavidWalters, Dennis
Proctor, K. HarveyWardle, C. (Bexhill)
Raffan, KeithWatson, John
Rhodes James, RobertWatts, John
Rhys Williams, Sir BrandonWells, Sir John (Maidstone)
Ridley, Rt Hon NicholasWiggin, Jerry
Rifkind, Rt Hon MalcolmWinterton, Mrs Ann
Roberts, Wyn (Conwy)Wolfson, Mark
Robinson, Mark (N'port W)Wood, Timothy
Roe, Mrs MarionYeo, Tim
Rost, PeterYoung, Sir George (Acton)
Ryder, RichardYounger, Rt Hon George
Sackville, Hon Thomas
Sainsbury, Hon TimothyTellers for the Ayes:
St. John-Stevas, Rt Hon N.Mr. Mark Lennox-Boyd and Mr. Michael Neubert.
Shaw, Sir Michael (Scarb')
Shepherd, Colin (Hereford)
NOES
Abse, LeoClelland, David Gordon
Adams, Allen (Paisley N)Clwyd, Mrs Ann
Alton, DavidCohen, Harry
Archer, Rt Hon PeterConlan, Bernard
Ashdown, PaddyCook, Frank (Stockton North)
Ashley, Rt Hon JackCorbett, Robin
Ashton, JoeCorbyn, Jeremy
Atkinson, N. (Tottenham)Craigen, J. M.
Bagier, Gordon A. T.Cunliffe, Lawrence
Barnes, Mrs RosemaryDavies, Rt Hon Denzil (L'lli)
Barron, KevinDavis, Terry (B'ham, H'ge H'l)
Beckett, Mrs MargaretDeakins, Eric
Bell, StuartDewar, Donald
Benn, Rt Hon TonyDixon, Donald
Bennett, A. (Dent'n & Red'sh)Dormand, Jack
Bermingham, GeraldDouglas, Dick
Bidwell, SydneyDubs, Alfred
Blair, AnthonyDuffy, A. E. P.
Bray, Dr JeremyDunwoody, Hon Mrs G.
Brown, Gordon (D'f'mline E)Eadie, Alex
Brown, Hugh D. (Provan)Eastham, Ken
Brown, N. (N'c'tle-u-Tyne E)Faulds, Andrew
Brown, Ron (E'burgh, Leith)Field, Frank (Birkenhead)
Bruce, MalcolmFields, T. (L'pool Broad Gn)
Caborn, RichardFlannery, Martin
Callaghan, Jim (Heyw'd & M)Foot, Rt Hon Michael
Campbell, IanFoster, Derek
Campbell-Savours, DaleFoulkes, George
Canavan, DennisFraser, J. (Norwood)
Carlile, Alexander (Montg'y)Freeson, Rt Hon Reginald
Carter-Jones, LewisGarrett, W. E.
Cartwright, JohnGeorge, Bruce
Clark, Dr David (S Shields)Gilbert, Rt Hon Dr John
Clay, RobertGodman, Dr Norman
Golding, Mrs LlinMitchell, Austin (G't Grimsby)
Gould, BryanMorris, Rt Hon A. (W'shawe)
Hamilton, James (M'well N)Morris, Rt Hon J. (Aberavon)
Hamilton, W. W. (Fife Central)Nellist, David
Harrison, Rt Hon WalterOakes, Rt Hon Gordon
Hart, Rt Hon Dame JudithO'Brien, William
Hattersley, Rt Hon RoyO'Neill, Martin
Healey, Rt Hon DenisPark, George
Heffer, Eric S.Patchett, Terry
Hogg, N. (C'nauld & Kilsyth)Pendry, Tom
Holland, Stuart (Vauxhall)Pike, Peter
Home Robertson, JohnPowell, Raymond (Ogmore)
Howell, Rt Hon D. (S'heath)Prescott, John
Howells, GeraintRadice, Giles
Hughes, Robert (Aberdeen N)Randall, Stuart
Hughes, Roy (Newport East)Raynsford, Nick
Hughes, Sean (Knowsley S)Rees, Rt Hon M. (Leeds S)
Janner, Hon GrevilleRichardson, Ms Jo
John, BrynmorRoberts, Allan (Bootle)
Kaufman, Rt Hon GeraldRobertson, George
Kirkwood, ArchyRooker, J. W.
Lambie, DavidRoss, Ernest (Dundee W)
Lamond, JamesRoss, Stephen (Isle of Wight)
Leighton, RonaldSedgemore, Brian
Lewis, Ron (Carlisle)Sheerman, Barry
Lewis, Terence (Worsley)Short, Mrs R.(W'hampt'n NE)
Litherland, RobertSkinner, Dennis
Livsey, RichardSmith, C.(Isl'ton S & F'bury)
Lloyd, Tony (Stretford)Snape, Peter
Lofthouse, GeoffreySteel, Rt Hon David
Loyden, EdwardStraw, Jack
McDonald, Dr OonaghTaylor, Matthew
McKay, Allen (Penistone)Thorne, Stan (Preston)
MacKenzie, Rt Hon GregorTinn, James
Maclennan, RobertWarden, Gareth (Gower)
McTaggart, RobertWeetch, Ken
Madden, MaxWelsh, Michael
Marshall, David (Shettleston)White, James
Martin, MichaelWilliams, Rt Hon A.
Mason, Rt Hon RoyWilson, Gordon
Maynard, Miss JoanWinnick, David
Meacher, MichaelWrigglesworth, Ian
Meadowcroft, Michael
Michie, WilliamTellers for the Noes:
Mikardo, IanMr. Frank Haynes and Mr. John McWilliam.
Millan, Rt Hon Bruce

Question accordingly agreed to.

Clause 20 ordered to stand part of the Bill.