State of the Economy

Part of the debate – in the House of Commons at 5:38 pm on 25th October 1988.

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Photo of Dr David Owen Dr David Owen , Plymouth, Devonport 5:38 pm, 25th October 1988

>: There is no doubt that this debate can have but one purpose: to make the Government—I am glad to see the Chancellor of the Exchequer in his place—rethink their attitude to child benefit. It is true that, over the past few years, there has been a crescendo of discussion of problems related to families—family abuse, alcoholism, violence and split families. I thought that all parts of the House shared a growing anxiety that many of today's social problems have their roots in the family and in something going wrong with it.

Money does not solve every problem in every family—we all know that—but making ends meet at the end of the week can be a major problem for millions of people. Considerable poverty is still concentrated in families, especially large ones in which the male earner is on low wages. A substantial proportion of people who should claim family income support and go out and get all the means-tested benefits that are theoretically available to them have always not done so—and still do not.

Some families do not take advantage of these means-tested benefits, but one benefit of which they do take advantage is child benefit, which constitutes a large proportion of their income. I think I am right to say that it contributes 18 per cent. of the incomes of families in the bottom 10 per cent. of income distribution. It is thus an extremely important weapon in dealing with family poverty.

We must face the fact that this will be the second time that child benefit has been frozen. It was also cut in November 1985. We should be talking about increasing it to £8·35 a week if we were to replace the April 1988 freeze and the November 1985 cut.

That is the honest answer, because many of the families will not take up other means-tested benefits, even if they are increased over and above inflation. The Chancellor should think again. It is reasonable to say that it is an unselective benefit, there are great problems of churning and, on the face of it, there is something rather silly about paying a benefit to people on high incomes. But the answer to that is a fundamental reform of the tax and benefits system, which the Chancellor still refuses to do. He lost a great opportunity in the most recent Budget. When he was lowering the tax rate from 60 per cent. to 40 per cent., that was the moment to make the national insurance contribution progressive right up through the tax base.

It will be much harder to integrate the tax and benefits system because the Chancellor did not take that opportunity to reform the national insurance contribution, which is, in effect, a tax system, but there is a growing feeling that there must come a day, and fairly soon, when every citizen has one form to fill in each year and as a result he will either benefit or pay out tax. It will be a means test for us all. Within that system, there will be a credit for children and a perfectly acceptable method of clawback for the large amount that needs to go into family income, which would be clawed back from the most wealthy. I know that such a reform would take three or four years to be fulfilled, but in its absence there is no alternative but to insist that the Chancellor does not go ahead with the proposal to freeze child benefit.

I remember that the first debate that I instituted as a Back Bencher, at Christmas 1966, was about family poverty. The present Chancellor of the Duchy of Lancaster, who was previously in the Department of Health and Social Security dealing with social security, understands the problem well. He knows that the provision will hit hard some of the families who can least afford it. For that reason, we shall vote for the Labour party motion, although not for its economics.

As for the Chancellor and the economic issues that face us, the problem seems to be that what we have not been able to achieve is cuts in tax that are then saved. Nobody wants higher tax, but it is vital to be able to save. The savings ratio is lower today than it has been for 30 years. Although the Chancellor announced a new savings measure in his speech to the Conservative party, it has been postponed until the new year—I imagine because he is worried about the success of the launch of the sale of British Steel rather than for any other reason. There is a strong case for that savings bond to be issued as soon as possible. The right hon. Gentleman has not yet announced the terms for it, but there is a strong case for the interest rate to be 10 per cent. net over five years and for there to be a £50,000 limit.

I hope that the right hon. Gentleman will introduce an imaginative way of siphoning off what is at the moment spending power that should be pushed into savings. I hope that he will also look at the French scheme, Loi Monory, for trying to use fiscal incentives to encourage wider share ownership, which is particularly attractive to middle income earners. There is now a real gap in the fiscal armoury, in encouraging savings. That is absolutely fundamental if the Chancellor is to be able to pull back the present consumer boom.

Most people have considered whether one can have selective restrictions on borrowing. I confess that I have not yet seen any that would not escape. One of the problems of deregulation is that it has made it immensely difficult to have the consumer constraints, selectively applied, that we used to have in the past. I wish that I could be convinced. If somebody had a good scheme, I should look at it.

The problem of using interest rates is that they are a blunt instrument. It will have to be used over the next five or six months; otherwise, we could have a serious slide in the sterling rate. Therefore, the Chancellor must look again at a selective measure to help first-time house purchasers. We must face the fact that in some parts of the country an initial house purchase entails a large sum of money. The increases in mortgage rates will be crippling and will hit hard young couples and first-time purchasers.

I for one believe that, in the problem that the Chancellor faces, which is what weight to give to inflation and what weight to give to the balance of payments crisis, he is right to give the maximum weight to inflation. Inasmuch as an anti-inflationary stance is now vital, there is no question but that the right hon. Gentleman must continue to be ready to make our interest rates higher than we should wish for our manufacturing industries. Again, he must consider a selective measure which, I agree, has the same problem of leakage that I mentioned over restraining consumer spending, and—this is a problem for the Chancellor of the Duchy of Lancaster—he should try to let industry borrow at preferential rates.

I know that in arbitrage and other things it is easy to escape it, but there are countries that operate schemes that give preference to industrial investment. Interest rates are staggeringly high in comparison with other countries, and the Chancellor suggested in his Mansion House speech that we might face a balance of payments problem all through 1989, which suggests pretty high interest rates during that time, perhaps into 1992. If that happens, we must consider the effect on manufacturing industry.

Manufacturing industry must consider its own problems. We face a 9·25 per cent. increase in earnings, and once again we are in grave jeopardy of pricing ourselves out of export markets. That is vital. I should find it easier to listen a little more attentively to industry's complaints about a non-competitive exchange rate if we were not seeing earnings rising at the present rate.

The Chancellor admitted that he made a mistake in the Budget. It is reasonable to make a mistake. I was interested to hear what he said today: "I might have made a mistake." I believe that in an interview with Mr. Walden, he said that perhaps his Budget judgment was not absolutely perfect.