Charge and Basic Rate of Income Tax for I988–89

Part of Orders of the Day — Finance (No. 2) Bill – in the House of Commons at 8:45 pm on 3rd May 1988.

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Photo of Mr Rhodri Morgan Mr Rhodri Morgan , Cardiff West 8:45 pm, 3rd May 1988

I am grateful to the hon. Gentleman for making that point. He is perfectly right. There is no direct interrelationship between low tax rates and the wall of money. The wall of money has hit this country and has sent the exchange rate soaring because of the indirect effects of low tax rates. Low tax rates caused concern in the City because they were not tight enough. That meant that the Chancellor has been unable to play the low interest rate card sufficiently strongly to keep away the wall of money.

I assume that the Chancellor agrees that we do not want to see exchange rates rise to the level that they have reached. I assume that he is with me in saying that, if we want to keep the economy on a growth path, we need to keep exchange rates at a reasonable competitive level with the deutschmark. I assume that he agrees that we want to see energy costs kept at a reasonable level. We do not want electricity prices to be increased by 9 per cent. with the 4·5 per cent. that the electricity industry wanted. We do not want to see gas prices going up as they have. We want to see modest utility costs that are comparable with those of competitor industries. We want to see interest rates at a level comparable with those in our main competitor countries. Low tax rates have meant that the Chancellor cannot play that interest rate card at the moment. He has modestly reduced interest rates, but he has been unable to keep away the wall of money.

What is more, we now have two simultaneous economic policies—one run by the Prime Minister, and one run by the Chancellor of the Exchequer. That is extremely damaging for British industry. I do not know where she got the idea, but the Prime Minister has heard that it is good to have two economic policies. I have heard that she may have got the idea from China. Perhaps it is the benefits of competition. The Chinese Government say that, when they take over Hong Kong, it will be proper to have one Government and two economic policies.

Is that what we shall have? Industry does not like that idea. It regards it as a complete abortion to have lack of clarity about the main purpose of the Government's exchange rate and interest rate policy. Is it to keep industry producing the goods? If it is not, we shall be in serious balance of payments trouble by the end of the year. It may be intended to cane workers who are again demonstrating early signs of militancy.

The London financial community thinks that it is extremely worrying. If hon. Members read their stockbrokers' circulars, as I am sure they do, they will have seen that there is concern that trade union militancy is rising at twice the level of unemployment of 10 or 15 years ago. So much for the great Thatcher revolution, as it is known. So much for the great supply revolution. The Phillips curve is now double the employment level of 10 years ago. Is that a great achievement? That is what the stockbroker circulars are saying.

Having sold the pass by skewing the economy in the direction of high priced imports by massive cuts in the higher rates of taxation, the Chancellor is in real difficulties. That must be worrying to anyone who has at heart the long-term interest of industry. The Prime Minister said that one cannot buck the market. The Chancellor thinks that by a policy of managed currency floating and a form of deutschmark shadowing, it is possible at least to assuage the market in order to obtain a relationship inwhich British industry can work. Industry will, therefore, know that if the currency rises it will not rise by more than the deutschmark.

All that has gone out of the window because the Chancellor found himself caught in the religious fetish of low personal income tax rates. He cut them to a rate that is too low to allow him freedom of movement in cutting interest rates, which was what was needed in order to correct the balance of payment problems that are looming on the skyline as we move towards a probable figure of £7 billion to £8 billion for our balance of trade deficit. That is the projection in the Red Book for the current financial year.

There is sectoral overheating in the economy. It has not yet emerged in retail prices index inflation, because it is mostly in the form of asset price inflation. We have seen it occurring in certain sectors of the economy, because the economy has become skewed towards the financial community in the south-east of England and the activities of the building industry.

Inflation in the building industry is moving rapidly upwards. I had an example in my constituency recently. We have been encouraged to become involved in charitable projects and recently I was involved in fund raising for a building project. The quantity surveyor's estimate for the project was £150,000. There was no delay between the quantity surveyor's estimate and the building tenders, but the lowest building tender was £225,000. That is 50 per cent. inflation. That kind of asset price inflation is caused by this skewing of the economy, which in turn is caused by reducing too much the top rate taxes.

We emphasise—I hope that there would be some support for this on the Government Back Benches—the long-term interest of rebuilding productive capacity in this country to take the place of North sea oil. Anything which merely causes the import of expensive luxury goods cannot be good for this country. We are already in a severe balance of payments crisis. We are consuming far more than we produce. That cannot be healthy. Our priority must be to invest in manufacturing industry and in research and development. We must lay emphasis on industrial training. We are training far fewer skilled workers than our main competitor countries, such as Italy, France and Germany.

If anyone were to ask British industry what it regards as the most important priority, not just for this year's Budget, but for the next two or three Budgets, it would say that there should be a clear policy from the Government as to where they are leading this country, as we move out of the North sea era and back to normality. When there is no windfall from the North sea, we will have to earn our living. As that problem becomes greater for us, we must revert to a policy whereby the taxation system, the interest rate system and the exhange rate policy of the Government are unified in order to make this country more productive, with its consumption and production in balance.

We appeal to the Chancellor and the Prime Minister to come together to resolve their apparently irreconcilable position on the exchange rate and on managed floating against free rising currencies. That penalises workers, who arc beginning to show greater balance between supply and demand for labour, which is having an impact on trade unions and wage bargaining. If Molotov and Ribbentrop could sign a pact, surely the Prime Minister and the Chancellor can do the same.

The Chancellor should not feel beleaguered. He should not be subject to finger-wagging in the Conservative Lobby or have to tell the world through magazines that his favourtie Shakespearian play is "The Taming of the Shrew." This policy will not give industry confidence to invest for the future to produce the goods that this country wants. It will not reduce unemployment to a level at which the Government will be able to say that social security payments can be reduced because unemployment has decreased and the country is productive again.