Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 7:10 pm on 7th July 1997.

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Photo of Michael Jack Michael Jack Conservative, Fylde 7:10 pm, 7th July 1997

I am grateful to you, Mr. Deputy Speaker, for being called to speak in the debate, as much of what the hon. Member for Stalybridge and Hyde (Mr. Pendry) said about tourism will have resonance on the Fylde coast, an area which I represent. Unfortunately, however, he did not touch on some of the hidden items of the new Government's ideas that will affect tourism—the minimum wage and the social chapter, both of which will have deleterious effects on employment prospects in Blackpool and Fylde.

Budgets are as interesting for what they say as for what they do not say. I listened carefully to what was, in presentation terms—it is never an easy task—a well-delivered Budget. The Chancellor gave us a little clue about forthcoming attractions, not all of them particularly attractive. He seemed to be outlining a policy that would allow him, in 2001 or 2002—having taken a very tough fiscal stance, as he has done in this Budget—to make some form of monetary easement, perhaps for short-term political advantage.

To that end, I fear that we are seeing just the beginning of further tax rises. Some commentators have indicated that, in terms of addressing our so-called structural deficit, the Chancellor has not gone far enough. Indeed, they put forward the view that if the Budget's objective was to control consumer spending, he may not have gone far enough. I might not entirely agree with that strategy, but I am sure that that is what he is doing. I fear that there will be further fiscal tightening to come.

My right hon. Friend the Member for South Norfolk (Mr. MacGregor), a former Chief Secretary to the Treasury, rightly reminded us that my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), the former Chancellor, left this country's public finances in an excellent state. It was with some surprise that, one year after we last published estimates, I saw in the Red Book that the total Inland Revenue tax take had increased by some £10 billion.

I remember the guffaws from Labour Members at our Red Book figures in the previous Budget, when we improved public finances. We were attacked for our timetabling for the closing of the fiscal balance. We have now seen that we were right. We beat the public sector borrowing requirement estimates in the Red Book by some £3 billion. The legacy that my right hon. and learned Friend laid down has come to fruition in the figures that the Labour Government have at their disposal. That is, perhaps, another reason why my right hon. and learned Friend would not necessarily have gone down the same route that the present Government have taken.

What does the strategy that the Chancellor is following mean? It seems that he has taken the Pontius Pilate approach to setting monetary targets, which he sub-contracted to the Bank of England. In trying to deal with consumer spending, he lays us open to the first serious risk of the Budget. He has given the Monetary Policy Committee of the Bank of England the task of hitting his inflation target. I shall have a word or two to say about that in a moment. That committee will not want to miss his target.

There is a very real danger, as Roger Bootle reminded us in The Times today, that there will be an over-tightening of monetary policy, with sterling continuing to rise, which will affect our manufacturing industry to the extent that there may be a form of monetary overkill. When we look at the inflationary factors in the economy at present, we see tight control over the important price indexes. We do not see a runaway in terms of earnings, at around 4.5 per cent. The marketplace is extremely competitive and will remain so because of the advantage to those who bring in goods from overseas.

The Chancellor seems to have ignored that in his strategy. In fact, on monetary policy, he has almost become a Chancellor without ambition. It is noteworthy that he relaxed my right hon. and learned Friend's tight inflation target of 2½ per cent. or less. I can remember the current Chancellor attacking the Conservative Government for having an inflation target that was above some of the European comparators that he chose, but now that he is in office and he can see the dangers of an over-tight monetary regime, he has given himself room for manoeuvre, so much so that he has upped his inflation target to 2¾per cent. for the next financial year. It is quite remarkable in some ways how the Red Book does not look ahead more than one year in terms of tax revenues and two years in terms of spending revenues.

The right hon. Gentleman is also a Chancellor without ambition in terms of the potential of the British economy. Any Chancellor who goes backwards in his growth forecast for the British economy to a forecast of 2¼ per cent. shows little faith in his own policies, which he says are supposed to improve the productive capacity of the economy, increase investment and do all the other supply-side things to which his Budget alluded.

It is quite interesting that, when the smoke clears, one sees how little ambition the Chancellor has on inflation and on growth in the economy. That is, perhaps, not surprising, because forecasting is difficult, particularly when it comes to monetary policy. The Economic Secretary to the Treasury, who is in her place, reminded me of that when I asked specific questions on interest rates. Her reply was a telling contribution: it is not possible to be sure about the precise level of interest rates required to hit an exact inflation rate ten months ahead."—[Official Report, 3 June 1997; Vol. 295, c. 147.] We know about the uncertainties of forecasting inflation rates and growth.

Other right hon. and hon. Members tellingly pointed to the fact that, now that the smoke has cleared, the fizz has gone out of last Wednesday's Budget champagne. By Thursday, a headline in the Financial Times pointed out that "Poorest Households Fare Worst". If a Conservative Budget had received such a headline, we would have been taken to the proverbial cleaners, but Labour Members cheered. These were socialists cheering. What a great beginning for socialists, who raised so many expectations in the election that those at the bottom of the pile might benefit. Those are the people whom the new Chancellor clobbers straight away.

By Sunday, the journalists were warming to the task in their critique of the Budget. David Smith in The Sunday Times entertained me over my cup of tea to the headline. "Brown gets into a budget mess". That is a pretty quick downward road to disaster for the Budget.

We also find that, despite all the meticulous planning of the Budget, within 24 hours the Paymaster General is rowing back from his proposals on foreign income dividends. That is a technical but important area of detail for Britain's overseas trade, involving the location of foreign companies with large-scale foreign interests in this country. When those companies blanched and said that they might have to move away, the Paymaster General quickly rowed back. That is not an issue to be tackled by amateurs, but the Government have taken an amateurish approach to a difficult subject.

One could argue that the same amateurism was shown over advance corporation tax. It is true that previous Conservative Governments took action in that area. One of the arguments that the Chancellor advanced was that the measure would achieve two ends. He said that it would encourage investment because it would take the pressure off companies to distribute profits. But that argument does not hold up. The former Chancellor, Norman Lamont, did not achieve that result when he reduced tax credits from 25 to 20 per cent.

The second argument advanced was that the measure would provide some sort of beginning for a change in corporate tax. The United States has a classical corporation tax system, and the percentage of profits distributed through the imputation system is greater there than it is in the United Kingdom. The case has not been made for a change in ACT bringing the investment results suggested by the Chancellor.

The more telling point involves the impact on individuals. My right hon. Friend the former Chief Secretary went as far as to say that considerable extra contributions could be required, particularly for those with personal, as opposed to final salary, pensions. It is a tawdry little Budget—the Government have not come clean and spelt out its financial implications.

We are supposed to live in the world of open government, but it takes the money page of the Financial Times to open the eyes of the individual. In his moment of discomfiture, I refer the Chief Secretary to what he may have read on Sunday. Using PensionStore as its source, The Sunday Times makes clear the effect of the abolition of ACT relief on personal pension holders who invest £100 a month. Assuming a 9 per cent. return per annum before abolition, a person aged 30 would have to pay another £20.12 a month to deal with the consequences of the Budget. Someone aged 40 would have to pay £13.69 and someone aged 50 would have to pay £7.52.

That measure has come from a Government who talk about building for the long term. Their monetary stance has made life exceedingly difficult for people who will now face considerable rises in their mortgage interest payments. Those payments will also rise considerably because of the reduction in tax relief on mortgage interest. A hidden tax has been introduced. It is incumbent on the Government to come clean and publish far more data, to ensure that people understand precisely what it is that the Government have in mind, so that they can make the appropriate personal finance arrangements to get their house in order.

I also ask the Government to give a commitment tonight to come clean as quickly as possible on the subject of personal savings accounts. People who are trying to decide whether to invest in PEPs or TESSAs will be in doubt about what they should do. We are talking not about fat-cat speculators, but about ordinary individuals with modest savings, who have been left in the dark about what the Government have in mind.