I want first to congratulate my right hon. Friend the Chancellor on his fifth Budget speech. His previous four Budget speeches were well constructed, to the point, and commendably brief. Today, my right hon. Friend has maintained the high standards that he established on those occasions and produced an interesting and skilful Budget. Hon. Members should be grateful for that at least, even if they do not necessarily agree with the provisions in the Budget.
My right hon. Friend has presented a complicated package this afternoon which requires and deserves deep study rather than too much instant reaction and comment. Let me warmly welcome some of the Budget's features.
I warmly welcome the changes in what my right hon. Friend called the taxation of marriage. I am pleased that husbands and wives are to be taxed separately in future. I would only say that I suspect that not all married women will wish to take advantage of that when they come up against the problems of dealing with their own taxation.
I also welcome the increase in the VAT threshold to £22,000. I do not complain too much about the increases in the duty on alcohol and, as a whisky drinker, I am pleased that there is to be no increase in that area. The Scottish nationalists can at least take some consolation from that.
I welcome the changes in capital gains tax. There will certainly be much more equity in its operation in future. But I must confess that, probably like most hon. Members, I was surprised that it was possible to make such changes at such low cost to the Exchequer.
I welcome, too, the change in the thresholds and the increase in income tax allowances. That was double the necessary rate on the basis of the Rooker-Wise-Lawson amendment in the late 1970s. It is noteworthy that personal allowances are now worth 25 per cent. more in real terms than in 1978–79.
As a Member of Parliament representing a largely rural seat I was not quite so keen — and I know that my constituents will not be quite so keen—on the increase in petrol duty. However, we have been used to such increases from both Labour and Conservative Chancellors for some considerable time.
The specific measures in any Budget are usually quickly forgotten, and, rightly or wrongly, I have no reason to believe that that will be any different on this occasion. But the consequences of the measures in this Budget, as in other Budgets, and of other decisions in the economic sphere will be with us for a long time.
Of course, we are not complete masters of our own destiny. Our economy is influenced by international economics and decisions taken by other Governments. However, I have noticed that that tends to be exaggerated by Governments when things go wrong and under-estimated when things go right. Nevertheless, a balance must be maintained and we should be careful not to pretend that we have no control over what happens in Britain.
My right hon. Friend has been faced today with much more difficult decisions in the Budget than most commentators have acknowledged. It is too simplistic to suggest that, because of the buoyancy of revenue, it was merely a matter of determining the size of the tax cuts. The current state of the balance of payments placed substantial constraints on his freedom of manoeuvre. At the same time, it was important to maintain and increase the level of domestic demand to ensure a continuation of the high rate of growth of the past few years and the consequent fall in unemployment. Therefore, my right hon. Friend was right to use some of the substantial surplus to maintain growth, and his Budget judgment, although generally cautious, was probably about right. However, I am not so sure about the make-up of his package.
After having had a sizeable balance of payments surplus for some years, there has been a deterioration in the past two years. Although last Friday's revised figures showed that the situation in 1986–87 had not been as bad as had been assumed, the situation is far from satisfactory. The revised figures show that we had a small surplus of £46 million in 1986 but that that had deteriorated into a deficit of £1·68 billion in 1987.
In the current year, as my right hon. Friend warned us this afternoon, there is likely to be a further deterioration in the balance of payments. It may be true that we can afford to run a deficit in the short term, but we cannot afford to do so indefinitely. In any event, it would be folly to dissipate the massive capital investments overseas that have been built up as a result of North sea oil over the last few years by consumer spending.
Unfortunately, that may be one of the consequences of today's tax cuts. Although I am sure that the tax cuts will be popular with the recipients, they will generate more consumer expenditure. In recent years there has been a strong tendency for additional consumer expenditure to find its way into an increased demand for imports rather than merely for the product of our domestic industry.
Therefore, my right hon. Friend's tax cuts involve a risk that some of the extra money released will find its way into imports. Since we are already in deficit on the balance of payments, and are heavily in deficit in trade in manufactured goods, it was unwise at this time to introduce tax cuts and so risk imposing further strains on an already weak balance of payments.
In the particular circumstances that obtain at present, I would have preferred my right hon. Friend to dispense his largesse in the form of public expenditure projects where import potential would be low or non-existent. In that respect, the N H S obviously comes to mind. Unlike the Opposition, I do not complain that there has been a reduction in expenditure in the Health Service over the last few years. That is not true. We all know that the only cuts in the Health Service that have taken place in the past 20 years took place under a Labour Government. None the less, it is possible further to increase expenditure in the Health Service and I would have preferred to see that done today. Apart from anything else, an increase in public expenditure would have enabled us to maintain a buoyant domestic demand and so protect the balance of payments. To me, it would have seemed a safer choice in the current conditions.
Having said that, I want to emphasise my support for my right hon. Friend's Budget judgment because of the importance of maintaining a high level of demand. Over the past 18 months the buoyancy of demand has enabled Britain to achieve a high growth rate, and, as a consequence of that, unemployment has fallen from 3·25 million to about 2·5 million—[Interruption.] I do not know whether the hon. Member for Glasgow, Cathcart (Mr. Maxtor) thinks that this is funny, but the 750,000 people who are no longer out of work, but who were 18 months ago, welcome that warmly. The Budget will maintain that buoyant demand.
Of late I have detected an increasing complacency about unemployment, and there have been some rather silly suggestions in some quarters that our economy is becoming over-heated. As long as 2·5 million people are out of work that complacency is unwarranted and the idea that there is over-heating is nonsensical. Between 1945 and 1974 we had almost full employment. It is true that the level fluctuated a little, but throughout that period we managed to maintain employment at a high level. Twice, briefly, unemployment exceeded 1 million and twice, also briefly, it was as low as 1·1 per cent. of the working population. That was in 1955 and in 1965.
When we look at what was possible during the 30 years after the war, we can see that we have a long way to go to get unemployment down from 2·5 million to a level that is acceptable to our people. To achieve this, an essential prerequisite is the continuation of a high rate of growth, and I believe that my right hon. Friend's Budget will achieve that. However, as I have explained, I would have preferred the public expenditure route to have been taken rather than the tax-cut route.
Another prerequisite for reducing unemployment is that sterling should not be overvalued. We all remember the dreadful damage done to British manufacturing industry and employment in the early 1980s when sterling was overvalued. The recent increase in the value of sterling is deeply worrying, although I welcome what my right hon. Friend the Chancellor has said about that this afternoon. I hope that he will continue to do everything that he can to reduce the value of sterling to a more sensible level, and that he will do that by reducing interest rates and taking whatever other measures are necessary. I hope also that he will continue to pursue the highly successful policy of exchange rate stability that he has pursued for the last 12 months.
Among other things, that means that Britain should join the exchange rate mechanism of the European monetary system, because that would give us much greater stability for more than 60 per cent. of our trade. This is long overdue. I hope that my right hon. Friend will not let ideological obsessions divert him from exchange rate stability and from British membership of the exchange rate mechanism of the EMS. This would be greatly in the interests of our economy and of the economy of Europe, and ultimately it would be greatly in the interests of the world economy.