Orders of the Day — Finance Bill

– in the House of Commons at 3:38 pm on 30th April 2002.

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[Relevant document: The Second Report from the Treasury Committee, Session 2001–02, on Budget 2002, HC 780.]

Order for Second Reading read.

Photo of Michael Martin Michael Martin Speaker of the House of Commons

I should inform the House that I have selected the amendment in the name of the Leader of the Opposition.

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury 3:49 pm, 30th April 2002

I beg to move, That the Bill be now read a Second time.

I am pleased to do so at a time of economic stability, with improving prospects for economic growth, with the right foundations on which to carry forward our work on enterprise and fairness and with investment and reform in our public services, securing the national health service for the future.

The Chancellor was able to report in his Budget statement that Britain has enjoyed

"the lowest inflation and the lowest interest rates for 40 years; for the first time for half a century, unemployment in Britain is lower than in America, lower than in Japan and lower than in the rest of Europe; and in the year just ended, Britain had the highest growth of any of our major competitors."—[Hansard, 17 April 2002; Vol. 130, c. 577.]

That record of economic stability has not happened by chance, but is a result of the tough choices that we have made and the new monetary and fiscal frameworks that we have put in place, which are serving the economy well in the global uncertainties that we have seen.

The challenge—indeed, the opportunity—for British industry and investors is to build on that hard-won stability, accelerate productivity improvements and increase output, jobs and prosperity. Although the economy has been stable, it can and must grow stronger. The Bill reflects the Government's clear role in ensuring the conditions necessary for successful businesses through important measures to modernise taxes, promote enterprise and cut red tape.

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons)

Will the Chief Secretary reconsider the Bill as it affects the North sea oil and gas industry and explain how those measures will bring stability? The Government have used that sector as an exemplar of how industry and the Government can work together, yet people in the industry are now in a state of shock and despair given that all the Government's understanding of them seems to have been swept away. The costs of operating in the North sea are so much higher than in other fields and the fields are so much smaller and therefore the returns are much more risky, so it seems a strange time to put up tax when other regimes have been lowering their taxes on the North sea.

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

On the North sea oil regime, our aim is, of course, to promote long-term investment in the North sea, while giving a fair return to the British people. So the Bill contains two important measures in relation to the North sea tax regime. First, to raise revenues, clauses 90 to 92 will introduce a supplementary charge at a rate of 10 per cent. on North sea profits; but, secondly, to support new investment, clause 62 will provide 100 per cent. first-year allowances for capital expenditure and investment in the North sea. I am advised that, under the allowance change and even with the supplementary charge, companies that invest in new fields will have higher post-tax rates of return than they would under the current regime. So we are striking the right balance between stimulating investment and getting a fair return to the British people.

Photo of Michael Jack Michael Jack Conservative, Fylde

Given the words that the right hon. Gentleman has just uttered, will he place in the Library what is effectively the business case, stating in detail how he has come to his conclusions, so that we may also make a balanced and informed judgment of those words?

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

I shall be very happy to write to Mr. Jack and to Sir Robert Smith and deposit a copy of the letter in the Library to illustrate my point about the interaction of the 100 per cent. capital allowance and the 10 per cent. charge.

On the platform of stability that we have put in place, the aim of the Budget, enshrined in the Bill, is to build a stronger enterprise culture, with higher productivity and investment. In recent years, British business investment levels have risen significantly from just over 10 per cent. of national income to almost 14 per cent.

Photo of David Ruffley David Ruffley Conservative, Bury St Edmunds

In the context of investment, will the Chief Secretary tell us what the savings ratio is this year, compared with the savings ratio that the Government inherited in 1996–97?

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

As I recall, the ratio is about 5 per cent. and is projected to go up gradually. As the hon. Gentleman well knows, the savings ratio reflects consumer confidence in their domestic financial position. One of the reasons why it went down was that consumers had more confidence and their household balance sheets were stronger than they had been in the years of boom and bust under the Conservatives, when they never knew what would happen to their financial circumstances.

We want to sustain and improve business investment and that is why in past Budgets we cut corporation tax from 33p to 30p, the lowest rate in our history. To encourage investment in the technologies of the future, clause 52 and schedule 12 extend an enhanced research and development tax credit to all companies. That means a £400 million boost for innovation and research in Britain.

To help companies restructure without key decisions being constrained by the tax system, clause 43 and schedule 8 set out an exemption for companies disposing of substantial shareholdings. That new relief forms part of the Government's commitment to reform and modernise the corporate tax regime, ensuring that the United Kingdom remains a good place in which to do business.

The Bill also sets out the new regime to provide relief for the cost of intangible assets, including intellectual property and goodwill. The new relief, details of which are set out in clause 83 and schedules 29 and 30, will encourage business to take advantage of opportunities in the knowledge-based economy. This is another important step in our programme of corporate tax reform.

Photo of Michael Weir Michael Weir Scottish National Party, Angus

The Minister has made many points about corporate tax reform, particularly with regard to corporation tax, but does he accept that in Scotland 75 per cent. of all small and medium-sized enterprises are either sole traders or partnerships and do not pay corporation tax? What is there in the Bill to help those businesses and truly help enterprise in Scotland?

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

I was coming later in my remarks to the steps that we are taking to raise the VAT threshold and greatly to simplify the administration of VAT, which I hope will come as a great help to the companies to which the hon. Gentleman refers. He is right to stress the importance of small businesses. They account for 55 per cent. of all private sector jobs—more than 10 million jobs in all—and nearly half the economy's output. Recognising their important role as employers and wealth creators is an important theme running through the Bill.

In 1997 we cut the small companies tax rate from 23p to 21p and in 1998 we cut it again to 20p with a starting rate of 10p. This year, clause 31 takes it down again to 19p with immediate effect. To send a strong signal to the small business community, clause 32 reduces the starting rate of corporation tax, also with immediate effect, from 10p to zero. That means that companies with profits of up to £10,000 will pay no corporation tax. The Budget set out the most favourable tax regime for small companies in any of the advanced industrial countries and the Finance Bill puts that into statute.

To fund the growth of innovative young companies, we need to increase the level of business investment. Private equity investment has doubled since 1997 and 38 per cent. of all EU private equity investment is in the UK. To maintain that momentum, the Bill will cut capital gains tax to 20 per cent. for business assets held for one year or more from this month. For business assets held for more than two years, it will cut capital gains tax to 10 per cent. That means that overall, Britain will have a capital gains tax regime more favourable to enterprise than even that of the United States.

We recognise too that the cost of compliance is an important issue and the Budget sets out proposals to reform the administration of VAT, to help smaller firms comply with PAYE and to remove unnecessary regulations. Clauses 23 to 25 set out the steps that we are taking in the Bill to simplify and streamline the VAT regime.

In disadvantaged areas, businesses can be a catalyst for community regeneration, so in 2,000 designated enterprise neighbourhoods, our small business tax cuts will be supported by further measures to encourage social entrepreneurs. First, there are measures on stamp duty on property transactions. In the pre-Budget report, we abolished stamp duty on home and business property transactions worth up to £150,000. For commercial transactions, we are now seeking state aid approval to abolish the limit altogether. Secondly, the community investment tax credit will take effect from this month, providing £25 million to support every £100 million of private sector investment. Clause 56 and schedules 16 and 17 set out the details.

We also believe that there is no necessary trade-off between economic growth and environmental protection. The challenge for us all is to achieve higher growth while enhancing the environment. It is increasingly recognised that sustainable development is an opportunity for British companies. Investing now in productive energy- saving technologies and techniques is important for competitiveness in this expanding global market.

We are taking further steps in the Bill to exempt from the climate change levy all electricity produced by combined heat and power. We will also exempt from the levy electricity generated by coal mine methane, which combines the social benefit of employment in mining communities and the environmental benefit of efficient energy production. More generally, investment in energy-saving technologies will qualify for capital allowances at an enhanced rate of 100 per cent., strengthening our economy as we move towards our Kyoto targets.

On cleaner fuels, the Bill introduces a fuel duty incentive on sulphur-free fuel. We have already announced fuel duty cuts for the development of hydrogen, biogas and methanol in pilot projects. Last week, my right hon. Friend the Financial Secretary invited further proposals for pilots that would help the development of cleaner fuels and which we would be prepared to support with fuel duty cuts and exemptions.

Incentives will also be introduced to encourage people to drive cleaner vehicles, with a licence fee reduction of £30 for the most efficient cars, £55 for the least polluting vans and £35 for the least polluting motor cycles. We have also announced our introduction of the distance- based road user charge for lorries, with offsetting cuts for the UK haulage industry to ensure that foreign lorry operators pay their fair share for using our roads. The details are set out in clause 134.

Photo of Patrick McLoughlin Patrick McLoughlin Opposition Deputy Chief Whip (Commons)

Some time ago, the Government announced that they would give the fuel duty rebate to community transport. Is there anything in the Bill that advances that commitment? When will we get the proposals that the Government promised they would make on that measure?

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

I understand that no such commitment was made, but as the hon. Gentleman has raised the matter, I will check it carefully and get back to him.

On waste disposal, we want to encourage the sustainable treatment of waste. As was expected, clause 119 increases the standard rate of landfill tax from £12 to £13. The Bill also includes important amendments to the operation of the aggregates levy and provides for the scheme's operation in Northern Ireland. Clauses 126 to 130 set out the details.

The goals of economic growth and environmental protection are intertwined in the policies of this Government. That was true of the Budget, it is true of the Bill and it will be true of the forthcoming spending review.

Photo of David Taylor David Taylor Labour/Co-operative, North West Leicestershire

I was pleased to hear of the planned increase in landfill charges, but does not the Minister recognise that associated with that steady increase in charges is a steady increase in fly-tipping of the type that my hon. Friend Joan Ruddock seeks to address in the private Member's Bill on waste that she introduced a moment ago? The problem exists in the constituencies of many hon. Members. Do the Government intend to tackle fly-tipping at the same time as making it more expensive to use our existing landfill sites?

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

My hon. Friend makes an important point, as did my hon. Friend the Member for Lewisham, Deptford in introducing her ten-minute Bill. That is partly why we have been reviewing and consulting on reform of the use of the fund that the levy makes possible to ensure that it is properly aligned both with our priorities and with those of the public for better recycling and clearing up mess wherever it is—as well as taking vigorous action against those who are responsible for fly-tipping.

Photo of Michael Jack Michael Jack Conservative, Fylde

When the landfill tax was introduced, there was a corresponding reduction in employers' national insurance contributions. Can the Chief Secretary explain why, for the second time under this Government's responsibility for that tax, no corresponding reduction has been made, although the landfill tax rate has been increased?

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

We have made a judgment on the overall balance between the reduction of 0.3 per cent. in employers' national insurance contributions and the establishment of the fund. As I said, we have been reviewing the fund's operation. In making that overall judgment, the effects must be considered together.

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

I should like to make a little more progress, if I may. I have been very generous in giving way.

To ensure fairness for taxpayers and businesses, we must act swiftly to close tax loopholes and be vigilant against tax avoidance. The Chancellor has therefore decided to act with immediate effect on the avoidance of stamp duty on property, to put an end to three artificial schemes for VAT avoidance and to review the complex rules of residence and domicile.

The heart of the Budget, as we debated last week, is to secure the long-term future of the national health service—a key priority for the Government. Tomorrow, we will have the opportunity to discuss the measures in the national insurance resolutions. The Bill freezes personal allowances for the under-65s in 2003–04, contributing to further investment and reform in public services and the NHS, which were starved of resources for 18 years under Conservative Governments, but will be renewed for generations to come by this Government.

We believe in a Britain where fairness and enterprise reinforce one another, where, on the platform of stability and tough fiscal rules that we have put in place, we can invest the resources needed for quality public services and make work pay, so that everyone is enabled to make the most of their potential. A strong and growing economy is crucial for a fairer Britain. The Bill, like the Budget, advances both, and I commend it to the House. 4.8 pm

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

I beg to move, To leave out from 'That' to the end of the Question, and to add instead thereof:

'this House declines to give a Second Reading to the Finance Bill because the provisions contained in its two volumes and 488 pages increase the burden of taxation on important sectors of the economy;
fail to make adequate commitments about taxation and personal allowances in future years;
and will have a negative impact on competitiveness and the attractiveness of the UK as a location for investment.'

I begin by drawing attention to my declaration in the Register of Members' Interests. Specifically, I do occasional work on staff communication skills with employees of J P Morgan and Deutsche Bank.

I can say without exaggeration, and with the assent of my right hon. and hon. Friends, that the Chief Secretary's speech in winding up the Budget debate last Tuesday was widely viewed as the most peculiar parliamentary performance of this Parliament, and probably of the past five years. The right hon. Gentleman was overcome with hysteria and propelled into such flights of uncontrolled fury that many Conservative Members feared that Vesuvius had exploded all over again. I am an observant as well as a compassionate chap and I therefore recognise that it was a terrifying experience for the Chief Secretary to try to cope with the forensic dissection of the Budget that my right hon. and learned Friend Mr. Howard unleashed. Nevertheless, let me say with all due courtesy that it is reassuring to observe that this afternoon he has returned to some semblance of normality.

Let me continue as I have begun, in a generous spirit and with some words of welcome for specific measures in the Finance Bill. We welcome the tax credit for research and development by large companies, even though it has been announced for the third time. We welcome the cut in corporation tax for small firms and the modest reform of the basis for the payment by companies of VAT. However, they and other not unwelcome features of the Budget must be viewed in the wider context of other, damaging imposts.

I refer specifically to an impost of which business is painfully aware: the £6 billion a year extra taxation with which it has been encumbered in the past five years and the additional burden of £5 billion a year in regulatory costs. Those burdens impede companies' ability to win orders and create jobs.

The Bill must be viewed in the light of the fact that new regulation that affects business has been introduced and continues to be introduced every 26 minutes of the working day. It must be viewed in the light of the fact that since the Government took office, Britain has plunged from ninth to 19th on the world competitiveness scoreboard. It must also be considered in the light of the fact that productivity growth is below that of the United States of America, under the Labour Government, when it was consistently above it under the previous, Conservative Government.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

In a moment. The hon. Gentleman tempts me; he will have to wait only a few minutes.

The measure must be examined in the light of the fact that this country's share of world exports has fallen since the Chancellor took office. The balance of trade deficit is there for all to see—it has damaged the country every month for the past four years. Indeed, the British Chambers of Commerce estimate that rail failures alone have cost the average company in this country no less than £21,000. The Chancellor is wont to speak in terms of telephone numbers and that figure might therefore be writ small in his thinking. However, as my hon. Friends know, it is significant to the companies that are damaged as a result. That is the crucial point.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

I can no longer resist the hon. Gentleman's soothing bromides.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

The hon. Gentleman is an expert on peculiar parliamentary performances, but is not it peculiar to cite so many statistics without reminding us of this country's record on growth compared with that of the other G7 nations?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

The hon. Gentleman tempts me. I shall comment on growth and the recent forecasts later. He might wish to advance his cause by making a speech or indulging in an intervention, but it is extremely foolish of him to assist me in mine. That is precisely what his ill-advised intervention has done.

The Bill is massive and its size continues and exacerbates a trend that we have witnessed in the past five years. The first Finance Bill of Margaret Thatcher's Government, which was commended to the House of Commons by the then Sir Geoffrey Howe, now my noble Friend Lord Howe of Aberavon, ran to 22 pages. For the elucidation of Labour Members, it was published on 18 June 1979. This Bill is the third largest that the Chancellor has introduced and the third largest of all time—it has 488 pages and is published in two volumes. As if that were not a grievous enough affliction, this 488-page, two-volume Bill is accompanied by a further two volumes of explanatory notes, which in total amount to no fewer than 604 extra pages.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

The hon. Gentleman must contain himself. I shall readily give way in a moment.

I leave it to the House to judge whether it was a tactful calculation or an inadvertent error on the part of the Government that the pages of the explanatory notes were left unnumbered. My indefatigable assistant was obliged to do the counting herself on my behalf.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

The hon. Gentleman is right to make a point about the inflating size of Finance Bills under this Government. Would he, however, care to comment on that trend under the Conservative Government? In 1995, the Finance Act ran to 566 pages.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

That is a very illuminating fact, and I disclaim all responsibility for it immediately on the ground that I was not here, I did not know, I am not responsible, I cannot be brought to book, and it is a matter of the most stupefying irrelevance to me. Whereas the Liberal Democrats want to focus on the past, my right hon. and hon. Friends on the Conservative Benches are concerned with the present and preoccupied with the future. That is the difference between forward-looking Conservatives and backward-looking, neanderthal, nit-picking Liberal Democrats, who will always remain the minority party.

Photo of David Taylor David Taylor Labour/Co-operative, North West Leicestershire

The hon. Gentleman is taking the House on an illuminating peregrination round the dimensions of the document before us. Is he not, however, living proof that a small size does not necessarily produce concise coherence of the kind with which he suggests Lady Thatcher's early legislation is associated?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

There are two answers to that. First, so far as I am concerned, there is hope yet, and I am still growing. Secondly, I say to David Taylor—who is always, if nothing else, very fair—that nothing was ever to be heard from my right hon. and noble Friend Lord Howe of Aberavon on the subject of Finance Bills that was not penetrating, persuasive and concise in equal measure.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

I shall give way to my right hon. Friend, who is a distinguished former Financial Secretary.

Photo of Michael Jack Michael Jack Conservative, Fylde

As someone who was responsible for quite a long Finance Bill, I wonder whether my hon. Friend would agree that the pages of the Finance Bills for which the last Conservative Government were responsible were quality pages that laid the foundations for the reform of the British economy and helped to leave it in its current robust state?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

My right hon. Friend is entirely right. He was a distinguished Financial Secretary to the Treasury, and the last Conservative Government bequeathed an outstanding economic legacy to this Government. The simple reality is that, as a consequence of successful economic policies pursued over 18 years by the Conservative party, we achieved record prosperity at home, secured respect abroad and helped to rediscover that sense of belief in ourselves that for so long, under Governments of both colours, had deserted us. That is the reality, and my right hon. Friend is sensible to point it out to me.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

Not at the moment. I am always tempted to give way because I like feeding on dog bones, but I will come back to the hon. Gentleman in due course.

The facts about the size of the Bill are all the more remarkable given the fact—to which the Chief Secretary elliptically referred—that it does not even include provision for the increases in national insurance contributions. The sheer, unbridled, crass ineptitude of the Government in moving the Budget resolutions was such—as the wider public should now be aware—that a separate debate on the national insurance rises is required tomorrow. That debate will be dealt with by the shadow Chancellor and by my hon. Friend Mr. Lidington.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

Is the hon. Gentleman aware that it is not normal practice to include national insurance matters in a Finance Bill, because national insurance contributions go not into the Consolidated Fund, but into the national insurance fund?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

That was an unfortunate intervention, because the reality is that the Government believed that that was the plan, but suddenly discovered that they had erred. They then grovelled to the Opposition in recognition of the fact that an extra parliamentary day would be required for this purpose. I would simply say, in all kindness to the hon. Gentleman, who is an agreeable companion outside the Palace of Westminster, that grovelling sycophancy should not be taken too far. I know that the hon. Gentleman is keen to impress those on the Treasury Bench, but if he is going to make interventions he should be clear that they are in line with the nous and information available to Ministers.

In the context of complexity, from which I know Labour Members are keen to distract attention, I refer to the verdict of John Whiting of PricewaterhouseCoopers, a distinguished and senior accountant on 25 April in the Financial Times:

"The only thing that keeps it bearable is the fact that we have seen a lot of it before. But for that, we'd be utterly floored."

The trend of ever more complex Finance Bills, and lengthier ones at that, is serious. It is compounded by the trend of ever more complex and lengthy tax law, as illustrated by the growing size of tax manuals. Tolley's standard tax manual, the bible of tax accountants, has grown by more than 30 per cent. in the past three years. As the Financial Times put it on 24 November last year:

"Tolley's manuals on VAT, income tax and corporation tax . . . have had to add a total of 855 pages to explain the gospel according to Gordon Brown. The three guides, which together have 3,414 pages, are longer than London's residential and business telephone directories. Tolley's has even had to reduce the print size to cram in more."

That is in no way a tribute to the Government. Rather, it is a searing indictment of their addiction to meddling, stealth and over-regulation. These are now the principal bugbears of individual taxpayers and British commerce alike. Clive Lewis, secretary to the Institute of Chartered Accountants enterprise group, was surely right when he said:

"Not only does the volume and complexity of regulation eat into the resources of a business, but it also absorbs time that could be spent more valuably on survival and expansion."

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

Will the hon. Gentleman give way?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

No. In due course I might, but I want to make some progress. I hope that the hon. Gentleman will be successful in catching the eye of Mr. Speaker or of one of his Deputies later.

I come to the effect of the Bill on income tax payers. Under clauses 27 and 28, the freeze in personal allowances for those under 65, combined with the freeze in the national insurance primary threshold, will raise £700 million in 2003–04 and an anticipated £850 million the year after. Millions of taxpayers will be poorer as a result. The Inland Revenue is now projecting an increase in the number of people paying the top rate—40 per cent.—of tax, from 2,080,000 in the last year of the Administration of John Major to 3,070,000 in 2003–04, when the higher national insurance contributions, which the Government said they would not introduce, kick into the groins of those who have to pay for them.

I would like to say something about the treatment of tax credits, about which the Government, if they have any conscience at all, should be ashamed.

Photo of Andrew Smith Andrew Smith The Chief Secretary to the Treasury

On the tax and national insurance increases, are the Conservatives pledged to reverse them, and would they cut that money from NHS spending?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

The right hon. Gentleman is very anxious. I can say beyond peradventure that we will set out our tax and spending plans with total clarity and absolute specificity well in time for the next election. If he seriously expects me, 10 months after we lost the last election on our previous manifesto, to announce the contents of the next manifesto, he is sadly deluding himself.

Photo of Patrick McLoughlin Patrick McLoughlin Opposition Deputy Chief Whip (Commons)

The Chief Secretary has asked a very stupid question, which we are used to from him. It was only just under 10 months ago that the Government said that they had no plans to raise national insurance charges.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

Deputy Chief Whips have many merits. One of them is that they remind people of points they should have made but did not. That is exactly what my hon. Friend has done. I am bestirred by what he has just said. On 29 May last year, Ms Hewitt, now Secretary of State for Trade and Industry, said that the Government had no plans to increase national insurance contributions. She went on boldly—but unwisely, as it transpired—to say, "It isn't going to happen." Given that the Government cannot make up their mind and stick to it over a period of 10 months, it is absurd and preposterous of the Chief Secretary to expect me, during today's Second Reading of the Finance Bill, to unveil the contents of the next Conservative manifesto. I shall do so later, but not now.

Until this Budget, the various tax credits for families that the Chancellor had introduced—particularly the working families tax credit—had been treated as negative taxation. As such, the tax burden appeared lower than if the credits had been treated as public expenditure, in accordance with international accounting convention. For years, Ministers have been stubbornly insisting that they are right and all their critics are wrong. A delicious irony is therefore to be found by fiscal anoraks who peruse box C2 of the Red Book, which illuminatingly states:

"The Government . . . has decided"—[Interruption.]

No, I shall read it slowly, because I want to maximise the shame and embarrassment of Government Members. They are not going to escape that shame and embarrassment. Box C2 states:

"The Government . . . has decided to adopt the OECD classification rules for the purposes of calculating net taxes and social security contributions, as used in the tax-GDP ratio consistent with international best practice . . . This change adds about 0.5 percentage points to the tax-GDP ratio for 1999–2000".

Belatedly, if not grudgingly, the Government have now admitted that they were wrong. The Red Book's main table on the tax burden not only contains tax burden outturn and estimates that differ from those in the Budget and the pre-Budget report of 2001; it also contains revised figures for those two financial statements.

Yet for all the complexity, minutiae and fog of statistics with which the Chancellor and his colleagues seek to blind us, the basic facts about the tax burden are brutally simple. The total tax take will rise by £6.1 billion by 2003–04, and by approximately £8 billion a year by 2005–06. The Government claim that this unprecedented pickpocketing is for the benefit of public services, but I ask the House to consider who will be worse off as a result of the Bill. Nurses will be worse off; police inspectors will be worse off; teachers will be worse off; average earners will be worse off; through measures to come, the national health service will be worse off as an employer; the police service will be worse off as an employer; and the education service will be worse off as an employer.

What we are getting from this Government is just more talk, more taxes, no change and no difference. Frankly, British people deserve better. In the past five years, taxes have gone up and public services have got worse. This country demands and deserves world-class public services, yet all the Labour Government do is tax more, waste more, fail to deliver improvements and refuse to learn from abroad. The Government demand more of voters' money, but they do not know how to make the NHS and other public services better. Every man, woman and child in this country is paying £1,600 more in taxation than in 1997, yet waiting lists are rising again, and the chances of surviving cancer in Britain are among the worst in Europe. Violent crime and street crime are reaching epidemic proportions, teacher vacancies doubled last year and truancy has risen. Under this Administration and the worst Secretary of State for Transport since his immediate predecessor, the trains have now descended into chaos.

Perhaps most shamefully of all, the Government are failing to meet the plethora of public service agreement targets that they set. For Ministers to fail to meet voters' expectations is bad enough—but for them to fail to meet their own expectations requires a breathtaking incompetence that is fast becoming the hallmark of this over-hyped and underperforming Administration. What a shower they are.

We read recently of what always starts to happen in Governments who have a chasm between the words they utter and the deeds they do. They start to fight like ferrets in a sack. The most recent manifestation of the discordant note that has been injected into Government business appeared in an article in The Independent last Friday by the respected political editor, Andrew Grice, under the title, "Brown wins battle with Blunkett on crime cash". The trouble with the Chancellor, who is a ministerial and departmental imperialist par excellence, is that he loves to trample over the terrain of all of his Cabinet colleagues. Is a new low being reached? It looks like it. The article says:

"Relations between Mr Brown and Mr Blunkett, who are the two front-runners to succeed Tony Blair, are said by Cabinet colleagues to be strained. They had a skirmish on the eve of last week's Budget over whether the Home Office would receive a cash top-up this year."

It says that the Chancellor

"has also expressed scepticism about the value for money achieved by previous Home Office initiatives and whether the high 'up-front' cost of Mr Blunkett's reforms to police working practices will deliver long-term benefits."

The Chancellor is also said to be irritated by the public campaigning for more money by the Home Secretary. There we have it. Relations are not good. It is looking rough and Ministers are turning on each other. They are failing to deliver, they are confounding the public, they are guilty of hype, they are getting it wrong and they are starting to panic.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

If I may bring the hon. Gentleman back to the Budget debate and to the documents before us, can he tell us whether he has read the Treasury Committee report published today, and whether he agrees with it?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

I am familiar with the report. I am grateful for the hon. Gentleman's prompting, because I have read it and have a view on it that I shall reveal to the House shortly. I know that the hon. Gentleman numbers patience among his qualities and I will happily offer him my verdict on that important matter in due course. However, even if the Liberal Democrats do not agree, I would have thought that many important features of the Bill remain to be addressed, including North sea oil taxation.

Clause 90 will introduce a 10 per cent. supplementary charge on companies producing oil or gas in the UK on the UK continental shelf. That charge will apply to companies' profits from the extraction of oil or gas in the UK or on the UK continental shelf. The Red Book predicts that the tax will cost the industry £100 million this year, £450 million next year and £600 million the year after that. However, commentators Wood McKenzie put the figures at £127 million, £454 million and £771 million, followed by £1 billion in 2005–06. Already it is predicted that investment will be discouraged, with a serious adverse impact on the Scottish economy. That is the considered judgment of the United Kingdom Offshore Operators Association and of the respected head of BP, Lord Brown, who said only last Tuesday:

"I don't think any other country in the world has increased production taxes in this way over the last 10 years—with two exceptions—Venezuela and Argentina."

The risk to jobs in the UK is so obvious, and to those in Scotland so palpable, that everyone is aware of those risks except, apparently, the Government.

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons)

I raise a constituency concern, and the hon. Gentleman is right to say that Scotland's economy is highly dependent on the industry. However, it is important to point out that the whole UK economy benefits from that investment. Businesses far from the North sea will find that their supply chain ends there.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

The hon. Gentleman is right and I agree with every word he said. Industry experts Wood McKenzie are understandably anxious that the changes could make the UK less attractive to investors and may delay or postpone the development of marginal fields. That is their considered verdict. If Ministers disagree, it would be helpful if they could invoke some evidence in their support.

Even before the Budget, we saw signs that activity in the North sea was slowing. What appraisal have the Government made of the latest round of licensing? I am told that one company has withdrawn its bid since the Budget, and many fear that the outcome of this round will be disappointing. In suggesting, as the Chief Secretary did, that the industry warrants further taxation, I put it to him that there is widespread concern that the Government have too little regard to the enormous capital requirements of UK continental shelf projects and the long time scales over which returns on investment are achieved. Measured by the return on capital employed, oil exploration and production has in fact been one of the lowest performing sectors over the past 20 years, underperforming in the overall UK market by more than 40 per cent. Furthermore, the Government's tax take is now up from 40.1 per cent. to 46.5 per cent. as a result of the Budget. That rate is higher than in the gulf of Mexico, Canada and Ireland.

The treatment of controlled foreign companies—a matter of breathtaking insignificance to the economic illiterates who pepper the Labour Benches—is a cause for concern to us and to many outside the House. The controlled foreign companies rules are designed to stop UK companies reducing their UK tax liability by diverting profits to subsidiaries in low tax regimes. Those rules work, broadly, by charging the UK parent companies of CFCs on an amount equal to the profits that would otherwise avoid tax.

The important point in this context is that clause 88 provides for a reserve power to make regulations specifying overseas jurisdictions to which the exemptions from the CFC rules will not apply. That is clearly targeted at the Crown dependencies of Jersey, Guernsey and the Isle of Man. The proposals concern subsidiaries of groups that have their headquarters in the United Kingdom.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

Oh, I know that the hon. Lady is very anxious; I will be referring to her in dispatches before long and of course I will then give her an opportunity to intervene.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am grateful to the hon. Gentleman for giving way so graciously. Will he remind the House of when the Conservative party introduced a similar reserve power when it was in Government, and why?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

No, I will not. I simply say to the hon. Lady that the circumstances in which the oil industry finds itself—the margins on its work, the extent of the investment required and the cost of the capital that is put into the process—are on a radically different scale from those that applied then. The verdict of Lord Brown of BP and the view of the United Kingdom Offshore Operators Association show that they see no comparison between the tax behaviour of the Conservative Government, in different and more propitious circumstances, and that over which the hon. Lady is cogitating now. I will come on to the subject of foreign companies and the hon. Lady's role in relation thereto.

This feature of the Finance Bill has nothing to do with tackling money laundering—rather, it is but the latest instalment in the Government's maniacal war against tax competition. The uncertainty resulting from this reserve power threatens the UK's position as a location for multinational companies' headquarters in the future.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

No, I will not, because I am dealing with the hon. Lady, which is a pleasurable experience from which I do not wish to be diverted.

A report in The Sunday Telegraph on 21 April offers a lurid account of telephone calls allegedly made by the Paymaster General to Senator Pierre Horsfall, Jersey's senior politician. He is said to have been given an ultimatum that unless his Government signed the European Union code of conduct by 16 April—the day before the Budget—his island would have to face unpleasant consequences, even though, as Crown dependencies, the Channel Islands are not in the European Union. The Channel Islands and the Isle of Man could scarcely be expected to offer to destroy the sector that provides 70 per cent. of their income. It is reasonable for them to rely on the guarantee given by this country 30 years ago when we joined the European Economic Community that their tax sovereignty was untouchable. For the Government to contemplate wrecking the economies of those dependencies is both financially short-sighted and, if I may say so, the most objectionable form of Executive bullying—[Hon. Members: "Hear, hear!"] Well, I wanted to get that off my chest.

On vehicle excise duty, schedule 5 makes changes to the vehicle taxation and registration system to provide that liability to tax the vehicle shall rest with the registered keeper. It creates the offence of failing to re-license a vehicle. It provides that a supplement may be charged where a vehicle keeper fails to re-license a vehicle, and that the amount of such a supplement and the circumstances in which it is payable shall be specified in regulations. The schedule will provide that vehicle excise duty shall be payable on any vehicle on the register, or used or kept on a public road, or on any former mechanically propelled vehicle that remains registered as a vehicle.

The trouble with that is twofold and simply stated. The Government are giving themselves the power to levy vehicle excise duty on vehicles that are neither used nor kept on the public road, and to tax things that used to be, but are no longer, mechanically propelled vehicles. If there is a new Labour logic somewhere in that bizarre and eccentric proposal, the Government will no doubt advise us of it, although the prospect seems improbable. In the circumstances—

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

No, I will not. I have already given way to the hon. Gentleman and I do not intend to do so again. I know that he wants to make a contribution and I look forward to it with bated breath and eager anticipation.

Motoring organisations have not been sufficiently consulted. The AA is understandably concerned about the measure and the Opposition will explore it in proper detail in Committee.

The Chancellor has boasted—not an uncommon phenomenon in the present incumbent—that he will cut beer duty by 50 per cent. for about 350 pub, local and micro-breweries that produce fewer than 2,500 pints of beer a day. However, the reaction to that has by no means been universally favourable, as Jim Burrows, the chief executive of Brakspear, has told us. He said:

"This clumsy tinkering with beer duty could eliminate the very British heritage the Chancellor claims to defend. His concession only partially implements the European directive on much needed duty savings, which were designed to help small traditional independent breweries to survive. But capping the concession where he has at 18,330 barrels, rather than at the higher 122,205 barrels European limit, will seriously damage a significant number of historic British regional brewers."

That ought to be a matter of concern to Members on both sides of the House, as there will be such breweries in the constituencies of a number of hon. and right hon. Labour Members and those breweries will be hurt. I wonder whether independent-minded and industrious Labour representatives of those constituents will seek to catch your eye, Mr. Deputy Speaker, to register their protest at the Government's behaviour.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

Oh, very well—the hon. Gentleman is so amiable. I shall give way for the last time.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I am especially grateful to the hon. Gentleman for indulging me.

The hon. Gentleman makes a strong case. Does he realise that the situation is even worse, as the cut in the price of a pint that the Chancellor announced on Budget day is unlikely to happen? It is extremely likely that the landlords and breweries will not pass on the cut in duty.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

I hope that the hon. Gentleman is not being too pessimistic, but he might be—[Interruption.] My hon. Friend Dr. Lewis rather ungenerously observes that the hon. Gentleman's intervention was "All froth". Only time will tell, I know not.

I have, typically, understated my critique of the Government this afternoon, but it would be a disservice to the House not to mention the stop-press news about the Budget. The verdict is highly critical; it states:

"We are concerned that the Chancellor's Budget may already be based on over-optimistic projections."

It continues:

"The imbalances between net trade and domestic demand, and in particular strong consumption growth, may present a challenge to the stability of the UK economy . . . We are not clear that the Budget makes any significant contribution to correcting the imbalances in the economy . . . We remain concerned about UK productivity which has lagged behind that of the United States."

It protests:

"The Treasury should have published the document 'Trend Growth: Recent Developments and Prospects' in advance of the Budget statement so that the House could have scrutinised it."

It points out:

"The Chancellor should have published at the time of the Budget the borrowing requirement for 2007–08."

It continues:

"We remain concerned that some Departments seem to be experiencing difficulties in delivering on the Government's agenda of increasing public sector investment."

Furthermore, it states that

"underspending has been significant in some Departments".

It complains:

"In terms of matching money to reform it remains far from clear what sanctions are proposed and how they might be implemented."

It notes in relation to taxation that

"the Government are guilty of sophistry."

It deplores the

"lack of consultation with foreign banks in London."

Furthermore, it demands

"publication of information on the take-up of tax credits".

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

That is the verdict of the report on the Budget published today by the distinguished Labour- dominated Select Committee on the Treasury. It is a savage denunciation of the Government by their own friends. Truly, we live in interesting times. The Committee stage is now an enticing prospect. My hon. Friends and I will approach it with relish.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe 4:46 pm, 30th April 2002

On the points that Mr. Bercow raised at the end of his speech, I shall credit him with perhaps not realising that what he calls a Labour-dominated Committee was in fact a childish ambush set by Conservative and Liberal Democrat Members to take advantage of a funeral. There is a long tradition that Select Committees operate by consensus. That tradition is normally to the benefit of Opposition Members, as otherwise Government Members on Select Committees would routinely pass motions praising the Government to the skies and approving every detail in every Bill.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

I shall finish my point, and then I shall give way.

On this occasion, because I was absent for the funeral of the brother of my hon. Friend Mr. Skinner, and because other hon. Members were absent for other reasons, Opposition Members took the opportunity to force through 25 wrecking amendments to the draft report that had been discussed on the basis of the deliberations of the previous week.

Photo of David Laws David Laws Shadow Spokesperson (Defence)

I am grateful to the hon. Gentleman for giving way, but I regret the intemperate language that he is using. He has completely misrepresented the amendments that were put through, which were not party political point scoring but which in many cases reflected the observations that had been made by expert advisers to the Committee. The hon. Gentleman, for whom I have great respect, should withdraw his accusations.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

Let us consider an example. In one of their amendments, the Conservative and Liberal Democrat Members on the Committee lay great emphasis on the alleged sophistry of having a ceiling on the standard rate of national insurance, because, they say, there is a 1 per cent. extra charge on higher incomes. That is the kind of piffling sophistry—I use the word that Opposition Members used—that so irritates people outside Westminster.

Several hon. Members:


Photo of Nick Palmer Nick Palmer Labour, Broxtowe

I will not give way, because I wish to continue my remarks for a moment.

The whole operation was typical of the kind of thing that annoys people about politicians. People say that we spend more time trying to trip each other up than we do addressing the issues. Not one of the amendments that the Conservatives and Liberal Democrats tabled to the draft proposals in Committee addresses the central issues for the population at large. Not one of the amendments deals with the national health service and whether the increase in funding is worth while. Not one of them deals with the child tax credit and the relief that it will provide to low-income families. Not one of them deals with the impact on the environment of the reduction in duties for non-polluting fuels. Instead, there was one piffling, technical amendment after another.

Photo of Michael Jack Michael Jack Conservative, Fylde

I have listened carefully to the hon. Gentleman's observations. If Labour members of the Committee were so concerned by what was happening when they were in a minority as decisions were being taken, will he explain why they did not produce a minority report in which they could have addressed the points that he has made?

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

I do not believe that there is provision for minority reports—[Interruption]—but even if there were, that would not address the essential point. The report makes perfectly clear the votes on each amendment. Again the right hon. Gentleman makes a point about parliamentary procedure and does not deal with the central issues that concern the population at large.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

The hon. Gentleman would not give way to me, but I shall give way to him.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

The hon. Gentleman's generosity of spirit is appreciated. This is a case of, "Methinks he doth protest too much." Does he not recall that Mr. McFall, the distinguished Chairman of the Treasury Committee, was present on the occasion in question and that it took place on a full parliamentary day when an important vote on a major piece of legislation was due to take place? It was greatly to the credit—and a proper of reflection of the attention to duty—of my hon. Friends the Members for Sevenoaks (Mr. Fallon), for Bury St. Edmunds (Mr. Ruffley) and for Chichester (Mr. Tyrie) and, in fairness, a reflection of the dedication of Mr. Laws, that they were present. They were doing their job, earning their salaries and respecting their constituents. It is a pity that Dr. Palmer did not display a similar attitude.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

I am sorry that the hon. Gentleman, who is normally an amiable fellow, takes the view that the funeral of a leading county councillor in my constituency is not an important matter. I disagree with him.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

My hon. Friend will be aware that, if one wants to produce a minority report in a Select Committee, one has to indicate one's desire to do so at the beginning of the proceedings. I voted 25 times in the Committee yesterday to try to get a slightly more sensible report and, if I had known about the way in which Conservative and Liberal Democrat members of the Committee wished to handle proceedings, I would have signalled my desire to produce such a report. Sadly, I assumed their good will and good sense, so I did not do that.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

I sympathise with my hon. Friend. It is sad, because hon. Members on both sides of the House have put a lot of effort into building up a sensible tradition of Select Committees. Unfortunately, the two Opposition parties are so desperate for petty tactical success that they put it first.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

No, because I want to move on to discuss the Budget itself. Whereas the Opposition Front- Bench spokesman, Mr. Bercow, dwelt for about 20 minutes on the number of pages in the Budget and on gossip about how Ministers get on with each other, I would like to address the content of the Budget.

The central feature of the Budget is that, for the first time in many years, adequate provision is foreseen for the health service. Strikingly, that was not addressed at all in the Opposition spokesman's introductory remarks. It was not as if he was in favour of it or against it; it simply was not addressed at all because he was too busy counting the number of pages in the Red Book. In the real world, there is broad consensus that however one organises the health system, funding for health in Britain is inadequate, and has been for many years under different Governments. We all know the reason why; until recent years, the economy has been in such a parlous state that successive Governments have been unable to provide adequate funding.

I am proud that we are now in a position to change that, but I note that the Opposition are unsure of their position. We are promised that at some time in the future they will say whether they support or oppose the commitment, but for the time being they are Delphic on the subject, which is why they concentrate on counting pages instead of looking at content. I have talked to my constituents about the impact of the Budget, but I have yet to meet one who wants to know how many pages are in the Red Book. I have yet to hear a constituent raise any of the issues raised by the Conservative spokesman. Again and again, people tell me, "At last we have a Government who are taking health seriously." Of course they have reservations—we should be open about this—about whether the money is really going to the NHS. After many years of frustration and disappointment, people naturally wonder whether we are really going to put the money in.

There is a political difficulty, which we all know about. There are thousands of hospitals in Britain and hundreds of thousands of people employed in the health service. It will always be possible—whether in three, eight or 100 years' time—to find a hospital somewhere in Britain where a mistake has been made or a problem has arisen, which Opposition spokespeople will use as an opportunity to show that the system is not working and the money has not produced results. They will do so, as the Opposition Health spokesman has said, to try to demolish public confidence in the health service so that they can introduce an alternative, even though they do not know what it is.

In the real world, people do not share that priority; they want our initiative to succeed and recognise that the Opposition do not want it to, which is one reason why the Opposition's response has so far failed to command interest, let alone support.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Imagine a major business suddenly telling the hon. Gentleman, "We are going to spend £40 billion on developing our business. We don't know how we are going to spend it or even if we can spend it. We haven't worked out what we are going to do." Does he think that that business would be a great success for Britain? Is that an effective way of planning investment and spending?

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

The hon. Gentleman's remarks seem to relate more to the way in which the Conservative party's finances are run than to the NHS. As he will be aware, the NHS plan was agreed by all the major bodies involved and commands widespread support. If he wants to highlight specific elements of the plan and discuss whether we can achieve them, we could obviously have a reasonable dialogue. I was sorry that his hon. Friend the Member for Buckingham attacked the individual objectives set by the Government and the alleged failure to achieve them. Those of us who have worked in management—I suspect that Mr. Flight has—recognise that if we do not set objectives we will not know if we have succeeded and will not be able to track progress. I welcome the fact that the Government have set themselves tough targets. Sometimes an individual target will not be met. We must have a serious dialogue about that, rather than picking up on the failure as if it were a hostage to be burned at the stake for political advantage.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

The position is even worse than I described. Not only have the Government set targets and in many cases failed to meet them, but in important respects where people could legitimately expect targets to be set, they have not set them. Is the hon. Gentleman sanguine about the fact that the Government have no public service agreement target for the reduction of bed blocking, for the reduction of the number of cancelled operations, or for the increase in the number of beds in the care home sector?

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

I am glad that the hon. Gentleman raises the issue, as I have discussed it in some detail with my health authority. I am somewhat inhibited by the fact that we are discussing the Budget, so I am not sure whether you, Mr. Deputy Speaker, will allow me to go into detail. Briefly, the health authority in my area says that bed blocking in the sense in which the hon. Member for Buckingham means it—inadequate funds—is not the key issue. The key issue is finding suitable accommodation with which patients are happy. That is not a financial issue, the health authority says. It is a matter of providing intermediate care in the hospitals. The health authority very much welcomes the additional funding that is coming through for that.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

Does my hon. Friend agree that although we have been arguing about numbers for the past few minutes, the essential difference between the Government and the Conservative Opposition is that the Conservatives cannot commit themselves to an NHS free at the point of use for everyone?

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

My hon. Friend is right. It is possible that one day the Conservatives will re-commit themselves to that—

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

But they are not doing so now.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

Indeed. Until now the Conservatives have always said through gritted teeth that they were willing to finance a national health service free at the point of use. They have not said that they were willing to finance it well, and we know from their period in government that they are not, but they have been willing to finance it on some basis. It now appears that that is not the case. That is a matter of grave concern to people out in the real world.

Let us return to the Westminster world, where we all feel at home and where we debate our points of order and our points of sophistry at our leisure. Another aspect of the Budget that has received widespread support is the commitment to a reduction in duty for combined heat and power, the reductions on methane and the support for green vehicles. The recent reports from the Cabinet Office on the future of energy expenditure in Britain make it clear that if we want to make significant progress within our lifetime, we must start now. We cannot delay.

I welcome the fact that the Chancellor has opened his doors to representatives of each of the industrial groups developing alternatives to the standard petrol engines, to encourage faster development. I welcome that not just because of the impact that it will have in Britain but because if Britain takes a lead in this area, we are likely to have an export market that will dwarf many of our present markets.

On my next point, I declare an interest: I advise my former company, Novartis, which is a multinational company involved in pharmaceutical research. The proposals to aid research in Britain are welcome, as they reinforce Britain's position as a science base. We cannot underestimate the importance of those proposals because, in the long term, the profile of the British economy will depend on whether we have that significant research base.

It is entirely possible that we could give up Britain's traditional scientific advantage and concentrate on call centres, insurance services and other traditional or not so traditional activities by which we could make a living in the world market. However, if we want balanced, long-term development that will benefit Britain not only under this Government but under any future Government whom we might imagine in our nightmares, that scientific base is essential, so I very much welcome those proposals.

I want to allow other hon. Members to speak, so I wish to make a final point on the Budget. I very much welcome the attempt to cut the illegal use of rebated fuel. Those of us who watched the fuel protests will have been struck by the large number of farmers who drove around on motorways and elsewhere, and many of us wondered whether they conscientiously siphoned out their rebated fuel before setting out. During the Select Committee hearings, Conservative Members attempted to find out which class of people were affected. The answer, of course, is the criminal class. That is the class of people who misuse rebated fuel for the purpose of making a profit.

I have a query for Ministers about whether it makes sense in the long term to have what is in effect a subsidy for farming through rebated fuel and whether it would not be better to have a market rate for that fuel and support farming by other means, possibly those that would attract match funding from the European Union. In the longer term, with our new Labour attachment to market mechanisms, it probably makes sense to move red fuel back towards the market rate, especially as we are trying to reduce the overall impact.

In concluding on that technical note, I should like to welcome the positive and focused nature of the Budget. To those who say that people on the street are horrified and alarmed by the one percentage point increase in national insurance contributions, all I can say is that the feedback that I have had from everyone I have spoken to in my constituency suggests that if that increase delivers the goods—the health service for which people hope—they will be hugely relieved, pleased and looking forward to a better future.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury) 5:08 pm, 30th April 2002

Dr. Palmer has in large part made a very measured and constructive contribution to the debate, but his earlier remarks on the Select Committee on the Treasury were wide of the mark. I speak as a former member of that Select Committee who was involved in the drafting of several reports, including those on the Budget. I remember from my time serving on that Committee that there was constructive debate when we considered draft reports.

When I look through the minutes at the back of the report and at the amendments tabled by Conservative Members and Liberal Democrat Members, especially my hon. Friend Mr. Laws, I see constructive amendments that relate to evidence provided to them by their expert external advisers. The advice and evidence were provided not by politicians or party pundits, but by experts in economics and finance. In that vein, I found the hon. Gentleman's remarks unwelcome and out of place in the House.

Although the hon. Gentleman may have had a valid, understandable reason not to be present, other Labour Members were not present either. If his objections to the report are to be considered, we need to understand why those Members were not there to argue their case. One can only presume from their absence that they were not interested or that they were not prepared to argue their case because they were embarrassed by aspects of the Budget.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

Whatever the hon. Gentleman's explanation of how the report came to be in its present form, does he believe that the views of the Treasury Committee, as now constituted, are accurately represented in that report?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

That is a surprising intervention. We have the report before us and it was passed in a proper manner through the due procedures. If it is not representative, that is the fault of the members of the Committee and those who were absent, not the Committee as a whole. That is the process of the House.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

As a member of the Committee, I should say that the overwhelming proportion of the report—almost all of it—was the Chairman's first draft. The huge row that has broken out concerns a relatively small part of a number of proposals in the summary of recommendations.

Photo of John McFall John McFall Chair, Treasury Committee

As the hon. Gentleman knows, the Chairman's drafts come before the Committee. If the hon. Gentleman looks at the back of the report he will see that 25 amendments were put forward. If 25 amendments are put forward, the Chairman's report is changed quite considerably. That is a matter of fact.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

It is a matter of fact that the report was changed significantly, but the amendments that were passed were based on the evidence provided by the external advisers. That is a key point.

Photo of David Laws David Laws Shadow Spokesperson (Defence)

Is my hon. Friend aware that some of the amendments that were passed to the Chairman's draft report—for example, recommendation (s), which welcomes measures in the Budget, and recommendation (k), which welcomes the Government's approach to the growth and stability pact—were tabled by Opposition Members to the Chairman's report and side with the Government? Is it not clear therefore that the suggestion of Dr. Palmer of an entirely partisan, political approach is not an accurate summary of the way the Committee conducted itself?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

My hon. Friend has the concluding remark to this part of the debate. He shows that he and Conservative Members played a constructive role in the debate and I recommend the report to other hon. Members.

Several hon. Members:


Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I shall not take further interventions on the report because many criticisms can be levied at the Finance Bill and I want to come to those. Tonight and during the next few months, my hon. Friends and I will be making those criticisms because we believe that many parts of the Bill are ill judged and damaging to the British economy. There are the ill-advised choices of taxes that the Government have sought to raise and there is the complexity that is piled on complexity.

Liberal Democrats will be tabling a series of amendments to show their constructive and genuine alternative to the Government's tax policy. While the Chancellor seems intent on tying up British business in tax bureaucracy, Liberal Democrats will be radical in their proposal to cut his Gordian knot.

Despite the Bill's failings, however, on Second Reading the House must be mindful of the core direction of the Budget's strategy—to provide the cash for our public services, and in particular, the health service. It took Mr. Bercow 20 minutes before he came to the health service, and that shows a complete misunderstanding of the Budget.

Liberal Democrats are unequivocal in welcoming the Government's U-turn from their general election position on that matter. Just under a year ago, Liberal Democrats argued at the general election that taxes had to rise to fund the services that we provide for each other. Our election campaign was focused on health, education, pensioners and police. It was distinguished and differentiated partly by the fact that we were arguing for higher taxes to make that revenue possible, and that extra revenue had to be found from somewhere.

Our opponents were vicious in attacking us. They said that we were wrong in saying that we could not have something for nothing, so we are delighted that Labour has now changed its course and agrees with us.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

Before I do so, let me say that the Liberal Democrats wish that the Government had made that position clear before the election. The process would have been fairer and more honest, frank, open and transparent and the Budget would have had even wider acclaim if they had put the proposals to the British electorate just 11 months ago. I hope that the hon. Gentleman can explain why they were not put before the electorate.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

I am grateful to the hon. Gentleman for giving way, but I shall stick to my original intention in making this intervention. Was not his party criticised at the time of the election because it said that it would fund every promise under the sun through a 1 per cent. increase in the basic rate of income tax?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

That was a disappointing intervention. If he had read our manifesto, which was accompanied by detailed costings, he would have seen that it set out a series of spending proposals that were fully costed on the basis of three major tax changes, including not only the penny on income tax, but the 50p charge on incomes of more than £100,000 a year—a proposal that was repeated in our alternative Budget. Indeed, we will be pushing and arguing for our alternative and against the Government's tax measures, which we think are far more damaging.

Photo of Bob Blizzard Bob Blizzard Labour, Waveney

Will the hon. Gentleman give way?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)


Interestingly, Labour's key policy changes after the last election and the 1997 election were based on Liberal Democrat manifesto commitments made in the campaigns. In 1997, in order to move away from the Conservative policies of boom and bust and failed economic management, the Labour Government rightly adopted our policy of establishing an independent central bank. [Laughter.] Labour Members laugh, but the proposal was not set out in their manifesto, so they should wipe the smiles off their faces. Perhaps they will be more amused by my next observation. It was interesting to hear Conservative Front Benchers try to take credit in the Budget debate for the independent central bank policy, when they had opposed it in government. It beggars belief that the Conservative Opposition are trying to take credit for that policy.

However, after the 2001 election, Labour has now adopted our policy of raising tax to invest in the public services. If only it had done so before.

Photo of Bob Blizzard Bob Blizzard Labour, Waveney

Will the hon. Gentleman give way?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)


If only Labour had adopted our specific tax policies, we would have had a much happier outcome, but at least it has shifted. It is the Conservative Front Benchers who are now left high and dry, voting against investment for the NHS. The Conservatives join the Liberal Democrats in criticising specific tax policies, and we welcome their support in opposing the Government on those measures, but they present the country with no alternative, so it can only surmise that in voting against the tax rises, the Conservatives want to vote against the health service. Instead of a coherent alternative health policy, we read in today's edition of the Financial Times that their health policy update—that is what they call it—will take at least another year to come into being. The Liberal Democrats wonder why. Perhaps on their Cook's tour of continental capitals, the Conservatives have rediscovered their previous love for Europe. They may have developed a taste for continental travel and for the euros jingling in their pockets, or perhaps their delay in proposing a constructive alternative has occurred simply because they do not know what to do.

Whatever the cause of the Tories' black hole on health, the Liberal Democrats at least know that they object to the NHS investment, and we will point that out, as I am sure Labour Members will.

Photo of Bob Blizzard Bob Blizzard Labour, Waveney

Will the hon. Gentleman give way?

Photo of Bob Blizzard Bob Blizzard Labour, Waveney

I am grateful. Now that the Government have raised extra revenue through taxation—I understand that the hon. Gentleman may not agree with their precise method—will he say whether his party now wants to raise still more through taxation?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I am grateful for the opportunity to put our response on record. We are waiting with bated breath for the publication of the spending review later this year. We need to ensure that the Government are investing in education, the police, pensioners and other issues. I tell the hon. Gentleman and Ministers that if that spending review does not provide the resources that are necessary for those key public services, we will continue arguing for extra tax revenue to make those essential investments.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I am not in the front rank when it comes to demanding additional cash, but there is one aspect of policy on which a small amount could go along way. Our troops in Afghanistan are serving alongside American troops in an area that the United States Government have defined as a hostile fire zone. The Americans get a complete income tax exemption during the time that they are serving in a hostile fire zone. Does my hon. Friend agree that the Government should match those terms? It would not cost much in public money, but it would go some way to showing this country's appreciation for our service men, who do so much for us.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

As usual, my hon. Friend makes a telling point, which deals with an aspect of taxation legislation that has not been raised in the House before. All hon. Members should welcome his remarks, which highlight the fact that our troops facing hostile action are not treated in the same way as American troops. I look forward to my hon. Friend pressing the Government in the Standing Committee to try to ensure that they put that matter right.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

No, I wish to make some progress.

If the Budget was good news for the NHS, the Chancellor's tax strategy is very bad news for UK plc. Certainly, the alternative Budget that we published before the election proposed tax rises, but they would not have clobbered business—they would have shared out the burden of paying for public services fairly among households.

I am delighted that the Treasury Select Committee, which has only one Liberal Democrat member, has today published a report that effectively backs up Liberal Democrat Members' concerns about the Chancellor's choices on taxes. I have never seen a Select Committee report that is so damning of a Chancellor's tax policy, drawing on the views of independent expert witnesses. I refer hon. Members to paragraph 54, which discusses the national insurance rises. It says:

"We think that the Treasury has, as yet, failed to make the case for choosing a method of revenue raising (higher employer and employee national insurance contributions) which excludes well-off pensioners and people living comfortably off unearned income from making a contribution to higher NHS spending."

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I shall not give way at the moment.

The proposals on employees' national insurance contributions exclude very wealthy pensioners and very wealthy people living off unearned income, who are not being asked to contribute to the NHS. Many of those people will not understand that, and some may think it unfair, because they, too, wish to make their contribution, but the Government will not let them. It is bizarre that the Government have chosen this relatively unfair way of raising tax.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

If the hon. Gentleman is saying that the Liberal Democrats would have raised taxation purely from households, by exactly how much would they have raised income tax in the unlikely circumstance that they had been able to do so?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I am increasingly surprised by the failure of Labour Members to read documents that we publish and place on our website, which set out our detailed policies. We argued for 1p on income tax, which would raise about £3.5 billion, and for a 50p tax rate on income above £100,000, which would raise just over £4 billion, and I refer the hon. Gentleman to one or two other tax measures described in those documents. Together, they would raise slightly more than the Government have raised through their Budget proposals, so he will have little success in pursuing his argument.

I refer hon. Members to paragraph 68 of the Select Committee's report, which deals with employers' national insurance contributions. The key point that the Government are having to wrestle with is their belated realisation that business is extremely concerned about the way that it has been treated in the Budget, because it contradicts what the Government have said in the past. In the 2000 Budget, the Government cut employers' national insurance contributions, linking that to the introduction of the climate change levy. They lauded that proposal and said that it would increase employment. When my hon. Friend the Member for Yeovil questioned the Chancellor about it at the Select Committee hearing, the Chancellor failed to acknowledge his point, and simply said that changes had been made in other years that meant that the increase would not be damaging to business. I am afraid that that was sophistry, and my hon. Friend was right to point it out. We all agree that raising money for the national health service is a valuable policy objective. However, placing the burden on employers' national insurance contributions, and thus on the basic cost of employing labour, must be bad news for the country and job creation. The Government will rue the day that they made that decision.

Photo of Wayne David Wayne David Labour, Caerphilly

Does the hon. Gentleman acknowledge that in 1999, for example, British business lost £10 billion through ill health absences?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I am sure that the hon. Gentleman is right but that does not mean that one should clobber business with extra taxes. It does not follow that doing that will suddenly create better health. The Liberal Democrats agree that there should be more investment in the health service. We have explained how we would achieve that; our method would not hit UK plc.

Photo of Michael Weir Michael Weir Scottish National Party, Angus

Does the hon. Gentleman agree that by going down the national insurance route and cutting corporation tax, the Chancellor may help companies but do nothing for sole traders and partnerships who bear the additional tax?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

The hon. Gentleman makes a good point, which I hope that those on the Treasury Bench have noted.

Using national insurance contributions to find extra money for the health service might have been appropriate if the Government had combined it with significant reforms. However, they chose not to do that. They could have made the national insurance system far fairer and more efficient but they did not do that.

We set out the alternative in our alternative Budget in the general election campaign. It is raising income tax. Why did the Government not do that? Because they made a grubby political promise at the last election. They cut income tax in the previous Parliament when they did not need to do that, and they were grubbing around for a tax to raise. They chose not to raise income tax because of a manifesto commitment yet they broke such a commitment and contradicted the utterings of Ministers during the election campaign by raising national insurance. By failing to raise income tax, which would have been fairer and more efficient, the Government put grubby politics before the health of the economy. They should apologise.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I have taken many interventions and I want to make some progress.

The Bill deals with far more than national insurance. It is riddled with errors that, like the national insurance increases, break two key economic tests for tax policy: fairness and efficiency.

Let us consider the policy on income tax allowances. By freezing them, the Government have increased the tax burden on the poorest. That is a bizarre position for the Labour Government to adopt. More low-income workers will be caught by the income tax system than by the national insurance system. Where did that appear in Labour's manifesto? The Rooker-Wise amendment was a great achievement by Labour Back Benchers in the late 1970s and the proposal to freeze allowances goes in the opposite direction. Labour Members should be ashamed of that.

The only defence that I have heard is that some of those affected will benefit from some tax credits. Let us debate the options. First, some people who are affected will not be eligible for the tax credits. Freezing the allowance will therefore hit some of the low paid, and low-income pensioners. Secondly, some of the tax credits are so complicated that many low-income workers will not claim them. Experience of the working families tax credit shows that. That is not a fair method of raising taxation.

Business efficiency has been hit. As my hon. Friend Sir Robert Smith said, the proposals to change the tax regime for the North sea oil industry are bizarre and a breach of faith. The Government consulted the industry for many months on different changes that would favour investment and help the industry but ensure that the Exchequer got its fair share. Suddenly, out of nowhere, they make the proposal that appeared in the Budget. If the Government cannot understand why business is losing confidence in them, they should consider the way in which they treat business. They consult, then go off in a completely different direction. That is not the way to win over or to support business.

The other inefficiency in the Finance Bill is its horrendous complexity. The hon. Member for Buckingham, who is no longer in his place, referred to that at length in terms of the number of pages in the Bill; I want to talk about it in relation to one or two of its proposals. Nine pages are devoted to a minor beer duty change, which we and the breweries believe will not even achieve the Chancellor's target of reducing the price of a pint of beer in time for the World cup. Thus nine pages are taken up by a tiny measure that will not even achieve its goal.

Fourteen pages and two schedules are devoted to a minor tax relief on vaccine research, which will probably also miss its target. We shall be looking at that research. It is a worthy aim, but whether the measure will achieve it is highly questionable, because the Government are using the tax system for inappropriate measures.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

The proposal is unlikely to achieve its aim because there are dead-weight costs, and because one cannot be sure that what is given tax relief is what we want to give tax relief to. For example, a pharmaceutical company with a whole range of drugs that it cannot sell in western markets could dump them on developing countries. Giving tax relief in those circumstances would be totally contrary to the Government's intentions.

Five clauses and one schedule are devoted to the aggregates tax, although we were told in the debate on last year's Finance Bill that the Government had sorted all that out, that there were no problems and that they could go ahead with the measure. The Liberal Democrats—and, to be fair, the Conservatives—said that the aggregates levy should not go ahead at that time because the problems had not been sorted out. The fact that the Government have presented the House with five clauses and a schedule on the matter tonight shows that we were right and they were wrong. They should delay the implementation of that tax until they have sorted it out properly.

All this complexity is the reason for the Liberal Democrats launching their campaign for simpler tax. Details of it can be found at www.simplertax.org.uk and I recommend it to hon. Members. We shall consult over a period of time with business, tax professionals and all other interested parties on a whole range of proposals for simplifying the tax system. We want to engage constructively with business and the tax professionals—the experts—to ensure that when we are in government and come before the House with tax proposals, they will be proposals to reform the tax system, to reduce the compliance costs for business and to introduce major micro-economic reforms to help UK plc.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

No, I want to make some progress.

I commend to the House one particular proposal on simpler tax in our first e-newsletter on the website, because it relates to the Finance Bill. We believe that film tax relief should be abolished. It is clear from the Bill that the Government realise that this little tax relief, which they put in place a few years ago, has become a complete rip-off. A whole series of companies are now exploiting it in a way that goes totally against the Government's original intention. Soap operas—the Coronation Streets and Emmerdales of this world—now claim that every episode is a film in its own right, to get the tax relief. How is that stimulating entrepreneurialism and innovation? Those reliefs only serve to create extra tax complexity.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

No, I will not give way.

We are now having to debate many pages in the Bill relating to anti-avoidance mechanisms for a relief that we should abolish. We should be taking those pages off the statute book.

To be fair to the Government, there are a number of measures in the Bill that we welcome. The fact that the bribes that companies used to give to win business overseas are no longer to be tax deductible is welcome; that is something that we have campaigned for. The extra support for amateur sports clubs is also welcome, as is the fact that some of the measures in the Bill have been widely consulted on. The increase in the inheritance tax rate band is welcome, as are certain other modest measures.

When we add up all those welcome measures, however, and stand back and ask, "Does this Bill improve the British tax system?", I am afraid that the answer is no. If it did not underlie a Budget strategy that we genuinely support, including investment in the health service, we would not feel able to vote for its Second Reading.

On Second Reading, it is customary to discuss the Treasury Select Committee report and the macro- economic policy that lie behind the Budget. I shall do so briefly. The Chancellor and, indeed, the Chief Secretary to the Treasury had, and have, a relatively good story to tell about the economy. Employment is high and unemployment is low, interest rates—both long-term and short-term—are low, and inflation is low. All that is welcome news, and represents a genuine achievement on the part of the Labour Government. The Budget, however, fails to address many failings. First and, in many ways, most significant is the fact that the British economy is incredibly unbalanced.

For some six or seven years, the growth of the economy has been fuelled by the consumer sector alone. It has not been fuelled by investment in business or in manufacturing. Labour Members know that, and they should worry about the fact that the Budget makes the situation worse by piling taxes on to the corporate sector and not restraining the consumption of the household sector through a balanced tax policy. The Government are leaving the job of dealing with consumer demand to the Monetary Policy Committee, which in due course will mean higher interest rates that will stifle investment. By failing to achieve a balanced tax policy—a policy that would help to balance the macro-economy—the Government are storing up serious problems.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

Will the hon. Gentleman give way?

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

I thank the hon. Gentleman. Is he saying that not only would he have preferred an income tax increase to a national insurance increase, but he would have preferred a larger increase?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

We have spelled out our proposals. We would have liked quite a large increase for those earning more than £100,000 a year and a modest increase for the remaining sector, which would have hit those who will not be clobbered by the national insurance contributions. We accept that that would have had a much bigger effect on private sector consumption, but it would have produced a much more balanced economic policy.

Concerns have been expressed about the Government's short-term growth forecasts. Just the other day we learned that in the first quarter of the year the economy has grown by only 0.1 per cent. If the Chancellor is to meet the growth targets that he announced a few days ago, that figure will have to be revised, or the economy will have to grow very fast during the remaining three quarters of the year. The Item Club, to whose pronouncements we should pay particular attention because it uses the Treasury's own forecasting model, has said independently that it does not believe the growth forecast will be met.

My main worry about the forecast, however, relates to the longer term. Both in 1999 and now in 2002, the Chancellor has increased his forecasts of the economy's underlying growth potential: the forecast in the Budget is 2.75 per cent. per annum. I do not quibble over whether that figure is achievable. It may well be achievable: indeed, owing to the excessive caution exercised by the Treasury up to now, it probably is, especially as public spending forecasts are currently based on a 2.5 per cent. forecast. What concerns me is the argument that the Government have produced to back up the change. If we really want to hold the Government to account, we must understand the thinking behind their policies, and analyse those policies rigorously to establish whether they meet the tests of arguments.

How do the Government say they can now revise upwards the underlying rate of growth? They have used a new report from the Government Actuary's department relating to an increase in the size of the labour force, and in particular the prediction that net migration will be slightly higher over the next few years. That may strike Members as very reasonable, but when we look at the detail and, specifically, at the Budget publication "Trend Growth: Recent Developments and Prospects", we find that the Government have not used the Actuary's principal forecast. They have gone away from the principal projection by the Government Actuary. They say that it is excessively cautious and believe that it should be higher. In using a new report to justify uplifting the growth forecast, the Government have gone against the forecast of the Government Actuary. It takes some explaining.

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford

The hon. Gentleman is laying all the emphasis on the increase in the size of the working population. Reports also show that, year on year, there has been growth in productivity. That alone justifies the change in the trend rate that the Government propose.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I am sorry but the hon. Gentleman clearly has not read the Government's own report. The Government assume in their forecast of underlying growth that productivity will stay the same. He cannot argue that underlying growth has increased due to productivity; his own Ministers are not arguing that. It is largely down to the change in net migration.

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford

Given that the hon. Gentleman is apparently reading from a paper, he might read it accurately. The Government are not projecting any increase in future growth; they are not saying that they have not allowed for growth over the past five years. They have made a cautious prediction, taking today's productivity growth and not allowing it to increase according to the measures introduced in the Budget. That is what the Budget is saying.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

The hon. Gentleman is completely wrong. The reason why this situation is particularly bizarre is that, at the same time as the Budget was published, the Wanless report was published. It tried to work out what the health needs of the nation would be in 20 years. When Wanless looked at population trends, he took the principal forecasts of the Government Actuary, not the higher one that has been assumed by the Government. The Government's core strategy was for health spending, but in their Budget strategy they use a different forecast of population growth from the Wanless report's.

I hope that the Minister will explain that in his summing-up speech. I also hope that the Government will do rather better than the document on trend growth, which provides no intellectual backing for the change. There is no model of the causes of emigration or immigration, and no analysis of whether they are to do with the relative economic performances of different countries, asylum policy or international political situations. All the independent expert advisers to the Select Committee on the Treasury said that it was an area of great uncertainty, yet the Government are not taking the principal projection of the Government Actuary. It is bizarre.

I had the privilege the other day of discussing such matters with senior people at the Bank of England. They informed me—I was not aware of it—that the statistics on immigration and emigration are among the weakest there are. Unlike other countries, which require people to register with the local police, for example, when they enter the country, we do not. I support that policy, but it limits our ability to understand net migration. We do not have the figures, yet the Government base their increase in growth forecast on that. They may be right; perhaps we will achieve that underlying growth, but they need a slightly better analysis in order to convince us. We hope that they are right.

It will be a long summer in the Finance Bill Standing Committee. We will have some long debates—[Interruption.] If Mr. Beard tempts me, I can speak for a lot longer. In fact, I think I will make some remarks; the hon. Gentleman has really tempted me.

I have a concern about the whole process that we are engaged in: the Finance Bill process. People who have to use the tax system say that it results in very poor scrutiny. The processes, the time and the whole ethos around the Standing Committee do not enable us to engage in constructive scrutiny.

Like Mr. Mitchell, I had the privilege of sitting on the Institute for Fiscal Studies tax law reform committee, which looked at the institutional processes behind a move towards tax simplification. That committee, which was staffed by experts, had a vigorous debate. It believed that the Finance Bill process is of second order and is failing this country, and that we need radical reform. As that is a process point, the Second Reading debate is the right place to make it.

The Chancellor wanted to create consensus on NHS investment, which was a bold and courageous ambition. Unfortunately, the Conservative party has prevented that consensus from being established. The Chancellor cannot take any blame for that, but he can take the blame for the fact that he has alienated a number of taxpayers, particularly in the corporate sector, because he has developed a tax policy that is unfair, inefficient and over-complex. Had he chosen a different route, he would have had even greater support, and we would be far surer than we can be today that we will get the quality NHS that our country deserves as a result of all the extra money.

Photo of John McFall John McFall Chair, Treasury Committee 5:46 pm, 30th April 2002

I am pleased to have the opportunity to speak on Second Reading. Mr. Davey has gone on a lot. I could sum up his speech with the slogan, "More and simpler tax." Given the promises that the Liberal Democrats have made, they will end up as the party with the simplest tax system in the country: they will be taking 100 per cent. of everyone's wages. They have to do an awful lot to convince people that their policies are credible.

It is the same with the official Opposition. Mr. Bercow made an indelicate rant. I look forward to the day when he improves and makes a delicate rant. Their whole argument is this. The shadow Chancellor, his boss, was on the radio and television today. In answer to a question, he said:

"it is clear that the NHS needs more money—it needs reform", but when the questioner asked him what the next stage was, he said:

"we will need to look . . . at how other countries do it".

How can a party have any credibility in opposing the Second Reading of a Finance Bill when it cannot come up with its own proposals? That question will plague Conservatives throughout the land until they answer it.

There was much ado about the Treasury Select Committee report. As the Chairman of the Committee, I wanted the opportunity to put the report into context. I feared that some people had their own gloss on it when I received a telephone call from a television station at 8 o'clock this morning, three hours before the report was published. However, let that be.

It is my responsibility as Chairman to ensure that the principles of the Committee are adhered to. Those are simple: as a Back-Bench Committee comprising hon. Members on both sides of the House, we have a responsibility to undergo an intellectual inquiry into the Budget. Everything we have said in the report, particularly the draft report, centres on that intellectual inquiry. I will go through the report on that basis.

The Select Committee report was preliminary. It was for the benefit of the House—to help it with the Second Reading. Paragraph 1 is clear:

"We may wish to consider some of the Budget's measures and proposals in greater detail at some appropriate time in the future, when we have had time to fully assess their implications."

In other words, we have not had time fully to assess their implications and we will come back to it. I tell the House and those on the Front Bench that we will come back to that particular issue. The statement is therefore provisional.

The report does not criticise the Government's budgetary aims; in fact, it welcomes the Budget's redistribution from high to low earners.

Photo of David Laws David Laws Shadow Spokesperson (Defence)

I entirely agree with the hon. Gentleman that the Select Committee's report welcomes certain Budget measures, but does he acknowledge that some of the amendments welcoming Government policy were tabled by Opposition Members, and enjoyed the support of the entire Committee?

Photo of John McFall John McFall Chair, Treasury Committee

Yes, but as I said, there were 25 amendments, and not all of them fell into that category. None the less, the hon. Gentleman is right and if he bears with me I shall mention some of the relevant issues.

As I said, the Committee welcomed the redistributive effect. It also welcomed the sound economy that the Government have built over the years. Britain has the fastest growth of any G7 country, and we are very pleased that, since 1997, over 1.5 million more jobs have been created. We are also pleased that inflation is at its lowest level for 20 or 30 years, and above all that the Government have made finances transparent over the long term.

Some of the experts to whom reference has been made spoke of a synchronised global slowdown, and said that the Government have forecast growth of about 2 per cent. to 2.5 per cent for 2002, and of 2.75 per cent. to 3.25 per cent. for 2003. We think that that is wise, because as the Chancellor said in his pre-Budget statement,

"No one country can insulate its economy" and stand on its own. He continued by saying that he is

"cautiously optimistic about the prospects for the British economy."—[Hansard, 27 November 2001; Vol. 375, c. 829-30.]

I shall return to the Committee's comments on that issue.

On the economic outlook, we agree with the OECD that the United States is leading the global upturn. Gross domestic product growth of 1.5 per cent. for 2002 has therefore been revised to 3 per cent. to 3.5 per cent. for 2003. Historically, the Government's growth projections have been on the low side, but that has changed. We took evidence from the Chancellor, Gus O'Donnell and other Treasury officials. Mr. O'Donnell's explanation of the growth prospects for 2002–03 seemed particularly realistic.

As the report makes clear, according to commentators such as Goldman Sachs, the Government are being optimistic. The report states:

"Whether the Treasury's growth forecasts are achievable remains to be seen, and we note the view that they are perhaps optimistic given the considerable uncertainties facing the global economy at the present time."

That approach is a reasonable one for any Committee that is charged with taking evidence from a wide range of people, and with engaging constructively with the Government, and the Chancellor in particular. We put such points to the Chancellor because it is incumbent on us to probe these issues, and to satisfy our own minds that matters are in order.

We are concerned about the imbalances to which the hon. Member for Kingston and Surbiton referred. We are mindful of the comments of Mervyn King, the deputy governor of the Bank of England, who said that the weakness of net trade

"cannot continue for many more years without leading to a trade deficit that would be painful to correct."

The report asserts:

"The imbalances between net trade and domestic demand, and in particular strong consumption growth, may present a challenge to the stability of the UK economy, and we encourage policymakers to remain alert to those risks."

That is a valid comment for any Treasury Committee to make, particularly in respect of imbalances. Goldman Sachs told the Committee that the Budget has not done enough to dampen consumer demand, and that the Monetary Policy Committee should take that factor into consideration. We questioned the Chancellor about that, and he made clear his views, and those of the Government.

The Government said that a trend growth of 2.75 per cent. had been established, but that was before they based their public finance forecast on the more cautious assessment of 2.5 per cent. When we considered those assumptions, the question of demographic changes and immigration arose. We should welcome the opportunity to debate immigration, but we should not tie it exclusively to the Second Reading of the Finance Bill. Countries such as the United States enjoy labour mobility, increased productivity and economic dynamism and interchange because they opened their doors and allowed people in. In that regard, immigration was seen as a valuable component. No Government should be afraid to take on such issues, and we need a wider debate. The issue of demographic change should be debated upfront, rather than being buried in our deliberations on Second Reading and in Committee. If we do that, we will be looking ahead and can perhaps put our economy on a more sound footing.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

The hon. Gentleman used the analogy of the United States. In respect of the skills that it needs, it has rightly taken the economically sensible decision to make immigration open and simple. Is that the essence of the hon. Gentleman's point about UK policy?

Photo of John McFall John McFall Chair, Treasury Committee

Exactly. Several universities in the north-east and north-west have recently been advertising for students from abroad. We give such students the skills, only for them to go back home. Why can we not have a green card system, so that such people can use their skills to the benefit of our economy, if they so choose? We need to consider these issues in a much more mature way, and that is the worthwhile contribution that the Committee is making to this debate.

The Committee also commented on productivity. The Chancellor has made jobs growth and productivity two of the hallmarks of his chancellorship, and he and the Department of Trade and Industry have produced a joint report on productivity. I applaud such efforts, but I have some concerns about the achievement of productivity targets. America cites the "new economy" as a major factor in its productivity, but whereas much of America's growth occurred in the mid-1990s, it has taken time to bed in in this country. In the next year, the Committee will try to discover what can be learned from different parts of the country by examining the twin objectives of jobs growth and productivity in the context of regional economies. We do not want to be dominated by Westminster or London; we want to know what is happening in the rest of the country.

As paragraph 21 of the report makes clear, examples of best practice could prove valuable to the general debate and to the Government's polices. It states:

"We remain concerned about UK productivity which has lagged behind that of the United States. We agree with the Budget's aim to increase the rate of growth of productivity and recommend that the effectiveness of the various measures included in the Budget for this purpose should be closely monitored and reported on in future pre-Budget Reports and Budget Statements."

We also considered the issue of fiscal policy and the Government's rules. They have two self-imposed targets, including the golden rule, but it is comforting to know that one of our experts, Carl Emmerson, from the Institute for Fiscal Studies, noted that even if the Treasury had not increased the assumed trend growth rate

"the Treasury forecasts would still suggest that the fiscal rules were going to be met"— although less comfortably than currently forecast. That is important for long-term trends and for the EU growth and stability pact.

Another aspect that we mentioned was underspending by Departments. That has a long history in Whitehall. The civil service mentality for years has been to take no risks. If individuals in Departments take no risks, they will never be accused of overspending. That is a cultural problem, and the Government must teach Departments how to spend. Last year, out of £200 billion some £7 billion was not spent. If we want to repair our public services, that underspending must be attended to.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

Does my hon. Friend agree that the move to multi-year funding is a step forward because it can result in an underspend in one financial year being spent in the next? That is more sensible.

Photo of John McFall John McFall Chair, Treasury Committee

It was a good move by the Chancellor to introduce the comprehensive spending review with a three-year spending programme. As I mentioned earlier, that is in its infancy still, but if the ambitious targets in the Budget—which I applaud—are to be met, we have to tackle the underspending. The Committee stated, in paragraph 38:

"However, we remain concerned that some departments seem to be experiencing difficulties in delivering on the Government's agenda of increasing public sector investment, and that under-spending has been significant in some departments. We believe that the comparison of departmental spending with planned intentions should be reviewed quarterly in the process outlined to us by the Chancellor. We also welcome the Treasury's acceptance that the relevant quarterly figures will be made available to the Treasury Committee."

It was one of the members of the Committee—my hon. Friend Mr. Beard—who asked for those figures to be provided quarterly, so that we can monitor the position and determine whether the total intended spending is achieved.

In terms of the Budget's impact on monetary policy, the Committee made no real comments, although we noted the symmetrical 2.5 per cent. target. While the point is not explicitly made in the report, I suggest that many members of the Committee laud that target, for which the MPC has responsibility. I certainly believe that when we engage with our European partners in the stability and growth pact, we should ensure that the best elements of what we have in our policy should be adopted.

The Committee commented on health spending. It is hard not to agree that the Government's health spending will be enormous, and that has to be welcomed. The NHS is one of the most treasured services in the country and its establishment was a cause of celebration for all the parties after 1948. If we can repair the NHS and ensure that the money supplied to it is spent wisely—that is a big issue, and the Committee hope that the Government will achieve that—everyone will applaud that. From the Wanless report and others, I have not learned of any provision elsewhere that matches the service we have, under which anyone who is sick receives comprehensive treatment locally, free at the point of use. I certainly enjoy that provision.

I direct the Minister's attention to paragraph 46, in which the Committee states:

"While the Chancellor told the House that the planned increase in NHS spending to 2007-08 represented a 43 per cent. increase, after inflation, the King's Fund"— a research body that examines health spending closely—

"have estimated that the increase would be 62 per cent. in cash terms, but only 35 per cent. in volume terms, taking into account NHS-specific inflation. This means, they estimate, that 'just over half . . . of the cash it . . . receives will be available for expanding services'."

In the light of those comments, the Committee looks for further information from the Government on which to base our assumptions and conclusions. That said, we welcome the extra spending for the NHS and we want to see it used wisely and properly, not thrown into a black hole. I have made that point to the Chancellor and others.

As a Scottish MP, and one who represents a constituency that has whisky interests—it is not awash with whisky, but we have some whisky plants—I have lobbied the Chancellor, along with my colleagues, not to adopt the strip stamp for whisky. I do not see any of my colleagues in their places—[Interruption.] I am sorry, there is a Scottish colleague in front of me and one behind, so I am well guarded. After massive lobbying, I am delighted that that measure was not in the Budget and I offer the Chancellor my congratulations on that.

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons)

My constituency also contains distilleries, and one in particular was very worried by the possibility of the introduction of the strip stamp, given its cash flow projections and the extra investment that would have been required. Its absence from the Budget was most welcome, but I warn the industry that I have also in the past welcomed the Government's treatment of the oil industry as very positive and that has not continued in the long term. I hope that the present policy on whisky continues and that the Government stick to their guns.

Photo of John McFall John McFall Chair, Treasury Committee

I received a letter from the Scotch Whisky Association that congratulated me, and others, on lobbying the Government on that issue. The Government have come up trumps and should be congratulated.

Mention has been made of tax credits. The Committee considered the poverty trap and the marginal rates. In the Red Book, the Government have given figures for marginal rates of taxation varying from 70 per cent. down to 50 per cent. There are no more 100 per cent. marginal tax rates, which should be welcomed, but issues of concern still arise that we wish to bring to the Government's attention. In some cases, we cannot avoid marginal tax rates and we certainly welcome the fact that measures have been implemented to make work pay.

In our report, we quote the comments that we have received from the Confederation of British Industry which indicated that workplace absences cost £10 billion in 1999. It is logical to conclude that if we improve the health service, we will benefit employees and employers. In that way, employers will also gain the benefit and that should be lauded.

Employers are also benefiting from the R and D tax credit. The Government introduced it originally for small companies, but the move to include large companies has prompted favourable comments. For example, the CBI has said that it is pleased with the consultation and with the measures that the Government have introduced.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am grateful to my hon. Friend for giving way. I have listened very carefully to his speech—

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. I am also trying to listen very carefully to what the Paymaster General is saying.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I must have read your mind, Mr. Deputy Speaker. Just before you spoke, I realised that I should swivel around to face you. I apologise, and I shall start again.

I am grateful to my hon. Friend for giving way, as I want to emphasise that the CBI has welcomed the research and development tax credit. Mr. Davey complained about complexity in the tax system, but does my hon. Friend consider that the CBI would rather do without the R and D tax credit, and that it would prefer that the relevant legislation did not appear on the statute book?

Photo of John McFall John McFall Chair, Treasury Committee

Your power, Mr. Deputy Speaker, is clearly greater than mine, as my hon. Friend the Paymaster General turned her back on me as soon as you spoke. However, I heard her question nevertheless.

The CBI has welcomed the R and D tax credit. It certainly wants the measure to be implemented. That is a plus for the consultation that has taken place between Government and industry.

I turn now to the stability and growth pact, and I draw the House's attention to paragraph 33 of the Treasury Committee's report. It states:

"We share the Government's view that the Stability and Growth Pact should be reformed to take account of issues such as the economic cycle, debt sustainability and the accounting for investment expenditure. We urge the Government to work with other Member States to find agreement on the definition and interpretation of the Stability and Growth Pact as soon as possible."

The Committee is making a wide-ranging inquiry into Europe, and I hope in the next few months that we will be able to visit the European Central Bank and speak to Wim Duisenberg and others. However, we will go charged with the belief that the Government's actions with regard to the Monetary Policy Committee and independence for the Bank of England have been good. The Committee urges the Government to begin a dialogue with other countries to find the best solution to such matters.

In conclusion, I am aware that the Government have tried, with this Budget, to build a consensus with regard to the welfare state. It is already clear that families will benefit from some useful measures. I used to be a schoolteacher, and I worked in a number of deprived areas, as they were termed. It warms me to know that child benefit, which in 1997 was worth £11 for the first child, has been raised to £16. Moreover, 5 million out 7 million families will now receive £27.50 for the first child, and poorer families will receive £54.50. That is of immeasurable benefit for families that have been at the margins of society.

I am very pleased, too, about the Government's proposals for pensioners. We must be alive to the fact that we must be generous to pensioners who have got by on small pensions but who have been penalised by the system. The fact that the pensioner credit will be available to between 5 million and 6 million pensioners is a cause for celebration. The average pensioner will be £8 a week better off from October, so many elderly people will be able to stay in their homes longer and look after themselves in a better fashion.

I agree with my right hon. Friend the Chancellor that we should use the tax and benefits system to build a consensus with regard to the welfare state. However, we must remember that nothing can be delivered if sound economic policies and a sound economic platform are not in place. The Government have established those policies and that platform, and I urge that they be maintained.

I am also at one with the Government in their ambition to enhance and promote public services. For too long—for decades—those services have been in disrepair. I want the Government to communicate to the electorate the fact that we have a viable strategy, but they must also make people understand that its implementation will take time. However, if we do not repair the public services, we could lose them all. This Budget hinges on that question. I urge the Government to stand by their fairness agenda for families and pensioners.

It is very important that Britain look outwards, to the EU and the third-world countries, so that we keep abreast of what is happening on the international stage. I shall be back, in another capacity, to urge the Government to do more about global poverty. I welcome my right hon. Friend the Chancellor's admission that we survive in the global economy but that half the people in the world are not engaged in it. We must be outward looking, and ensure that the fairness agenda applies globally, and is not confined by borders.

Photo of Michael Jack Michael Jack Conservative, Fylde 6:16 pm, 30th April 2002

I am grateful to be called to speak. At the outset, may I remind the House of the declaration of my business interests in the Register of Members' Interests, and in particular my role as a non-executive director of a retail tile company?

I listened to Mr. McFall with interest. He spoke with the authority that goes with being Chairman of one of the most important Select Committees in the House, and he reminded us of some of the important economic parameters underpinning the Budget and this Finance Bill. The hon. Gentleman made clear the importance that he attaches—as do many others—to having good-quality public services in this country. I think that hon. Members of all parties share that view in connection with the health service. We are divided by a difference of opinion as to how we should achieve that, but that is probably healthy in its own way. Labour Members should not criticise the Opposition simply for the fact that we are still debating the matter and have not yet reached a decision.

I should like also to recognise the work of officials in the Treasury and the Inland Revenue, who are not present in the Chamber and who cannot speak about the Finance Bill and the Budget. I used to be involved in putting together Finance Bills, and I recognise the singular contribution those officials make. Regardless of the contents of the Bill, a huge amount of work goes into producing it. I, for one, am grateful that the task has been performed with skill once again this year.

Some of the measures in the Bill are very debatable, but there are others that I welcome. The simplification of VAT will certainly be welcomed by many small and medium-sized enterprises, and I know that hon. Members of all parties are united in their welcome for the important proposals to help sports clubs with financing.

In addition, I was very pleased with the sections of the Bill dealing with combined heat and power, and with the proposal to modify the climate change levy, which will no longer be charged on the electricity sold by CHP systems into the national grid. When the climate change levy was introduced, I stood at this very location in the Chamber and made that same proposal, and I was supported by hon. Members from all parties. I am glad that the Government—the sinners on that occasion—have repented, but it is a case of, "I told you so."

If the Government are in repenting mood on the climate change levy, I hope that they will look again the position of the horticulture industry which, as the Paymaster General knows, is carbon neutral. I have entertained hon. Members before with detailed expositions as to why that industry should be given relief from the levy. Now that the light is dawning on the Government, it is possible that it will dawn again on the horticulture industry.

I am especially pleased with clause 37, which introduces some important minor changes to the operation of schedule E. I am aware that the changes are a response to representations, if I can put it thus, from those involved in the tax law rewrite exercise. That has not happened before. Much had been said already about the complexities of our tax system, and I shall have more to say about that in a moment.

I am pleased that the Finance Bill is being used as a way to aid the process—at least within the strictures of the rewrite exercise—of making our existing law understandable. It raises an interesting point. We praise that exercise for its clarity, but to pick up the point of Mr. Davey, there are in many cases more pages of clearer tax exposition. The real challenge for those of us who debate the length, weight and size of a Finance Bill is to decide what we want from our tax system in a complex world.

I listened carefully to the analysis of some of the many pages that have been required on aggregates tax and changes in matters connected with petroleum, and probably they are too long. However, we have no mechanism to debate the efficient operation of our tax system. I think that the time is right for the Government to consider having a standing commission on the operation of the tax system. We have a Law Commission, and from time to time it makes important recommendations about how the law of the land could be changed and improved. I think that a similar mechanism is now required for the tax system so that we can examine in detail how to make it operate properly.

I acknowledge that the legitimately elected Government of the day have the right to raise the money that they think fit, and we have the right to object to that if we disagree. However, there are ways, as the tax law rewrite exercise shows, in which the operation of the tax system can be made more efficient. A commission made up of experts with, if necessary, a political input, might be a way of creating neutral territory on which recommendations about the operation of our tax system can be made on a continuing basis.

In welcoming parts of the Bill, may I also welcome the extension of the age allowance to many pensioners? That is right for someone who has worked hard, particularly when returns from pensions are under pressure—largely as a result of falling stock market returns. However, the Government are complicit because of the ending of the payable tax credit. Vicars, for example, are especially badly off as the Church of England is £12 million down in its pension scheme. That is the reality, and anything that can be done to ensure that there is tax relief for pensioners who may be living on more modest means is welcome.

To date, the debate has centred on the reaction of business to the Finance Bill. I was struck by this headline in the Financial Times:

"CBI chief warns Brown of fading business support".

The gin and tonic and prawn cocktail circuit surrounding the 1997 election may have left business with a warm and friendly feeling, but now, particularly with the national insurance changes, that is wearing thin.

I come to some items that are not in the Bill. However, I would like them to be debated in Committee and I hope that the Government will consider them. I said in 2000 that in life assurance products, the way in which the I-E formula dealt with capital gains tax had not been amended to reflect changes in the capital gains tax regime as it applied to the individual. The Government did change, within that formulaic approach, the way in which personal taxation affected individuals.

I mention that because such products are the basis of many people's saving expectations for the future. That area has not been attended to, but it would be simple to do so and the cost would be relatively modest. In a letter sent to me in 2000, the former Financial Secretary to the Treasury told me that it would cost £30 million. That would enable there to be a modest improvement in the return to those policies if the internal capital gains tax regime was brought into line with wider capital gains tax changes. The hon. Gentleman did me the courtesy, in writing his letter, to say that the matter had been considered carefully by the Treasury, but that it was not minded to make the change just yet. I have been very patient, and now suggest to the Paymaster General that the time is right to look at that. It is a relatively inexpensive way of ensuring that life assurance policies returns can be improved and that their internal tax regimes are in line with wider tax activity.

In his concluding comments, the hon. Member for Dumbarton referred to the fact that large parts of the world are totally disconnected from the wealth and economic growth mentioned in the earlier part of his speech. I propose that the Government should give serious consideration to developing a tax credit to encourage investment by British companies in some of the least developed parts of the world. It would, by definition, be riskier, but what I have read about the workings of overseas aid leads me to believe that the private sector can make a positive contribution. British companies need some encouragement, and a credit such as I have described might be one way of addressing that issue.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

If the right hon. Gentleman casts his mind back to when he was Financial Secretary to the Treasury, he will recall that some of our double taxation treaties tried to address that point. Unfortunately, they were systematically misused, resulting in the loss of huge amounts of revenue to the Treasury and no gain to the developing nation concerned. The point made by both the right hon. Gentleman and my hon. Friend Mr. McFall is to be carefully considered, but I am sure that the right hon. Gentleman will remember that, unfortunately, once something is in the tax system it can be used in ways that were never intended. That has certainly been our experience.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am grateful to the hon. Lady for the kind way in which she has responded to my point and for her agreement that it should at least be considered. I accept that we must be concerned about the abuse of the tax system, which I shall talk about in the context of tax relief for films. However, the time has come to see what encouragement we can give to genuine investment efforts. The Government have talked about addressing the issue of the devil making work for idle hands; in areas that are potential hotbeds of world terrorism, this objective is worth re-examining.

I am delighted to learn that companies such as Grosvenor Estates are in discussion with the Treasury and the Inland Revenue about section 13 of the Taxation of Chargeable Gains Act 1992 and the way in which private companies can trade legitimately in terms of their capital gains without being unfairly affected, as they would judge it, by the current mechanism. Companies such as Grosvenor Estates, which are entirely legitimate and do not use mechanisms afforded to private companies for illegitimate activities, deserve a fair hearing, and I am delighted to learn that those discussions are continuing.

I come now to the items in the Bill, and wish to focus on films, oil, capital gains tax, the oil strategy and associated matters. It is noteworthy that the Government's desire to restrict the tax relief on expenditure on the production of British qualifying films is buried in an Inland Revenue press release. I find it difficult to find an individual press release on the subject.

In the Chancellor's Budget speech in 1997, he talked about wanting to help the talents of British film-makers. He said that they should be employed, wherever possible, to the benefit of the British economy. He was mournful of the fact that the British film industry had not, in his judgment, received the encouragement that it deserved.

The Chancellor said that, after consideration, he would provide a three-year measure costing £30 million to encourage the British film industry. It has been interesting to see how, perhaps with typically cinematic imagination, the film industry has freeloaded on the Chancellor's tax generosity. As someone who gamely fought against giving relief to the film industry, because I could see no justification for helping that particular group of luvvies, I ask the Paymaster General to explain how assistance of £30 million to the film industry has led to the Treasury's estimate that next year, 2003–04, it will raise and recover £225 million, and £295 million in the following year. Perhaps the hon. Lady can enlighten us, either tonight or in the Standing Committee, as to what went wrong with the drafting of that relief; how the film industry freeloaded on the Government; how the Government were conned into the proposal in the first place; and why they have only now woken up to the fact that they have been taken—in common parlance—for "a right tater" by the film industry.

On the question of the oil industry, here again the Government are seeking to raise revenue through the measure. Some heroic work is going on in the Treasury with the addition of the 10 per cent. supplementary charge on the corporation tax of continental fields. In the current financial year, we start off at £100 million; then we go to £450 million; and then, in a massive leap, to £600 million. That is why I asked the Chief Secretary if he would be kind enough to put the business case. I, for one, want to know what lies behind those heroic revenue increases. What analysis has been carried out with the oil industry to examine its investment opportunities?

The United Kingdom Offshore Operators Association reminded me that in this financial year, 2001–02, the Government have already raised £5.2 billion in tax from the oil industry—an increase of 25 per cent. over the previous year. In information furnished to me and, I am sure, to other Members, the UKOOA states that the measure, which came very much out of the blue, has shaken industry confidence. The association points out:

"The 10 per cent. supplementary charge on North Sea profits will raise the UK marginal rate to 73.75 per cent."

More tellingly, the UKOOA calculates that, in the period until 2010, the charge will remove £5 billion of capital resources from the industry. That is why we deserve to see some business modelling. What will be the effect on offshore development in the UK of taking £5 billion out of the industry?

The experts at Wood Mackenzie have already been quoted. They point out that if the oil price falls to below $20 a barrel, the mathematics of the formula currently proposed by the Treasury mean that 10 per cent. is the wrong figure if the Government want to raise the £100 million cited in the Red Book for 2002–03. For example, Wood Mackenzie calculates that an oil price of $19.50 would raise £127 million. That gives rise to the question of how sensitive that levy is to changes in the oil price.

Furthermore, the fact that the financing costs for debt cannot be set against the supplementary charge is a drawback to development. The UKOOA advises us:

"Debt finance is vital to be able to develop projects and could represent up to 70 per cent. of a project's development funding."

We shall have to go into some important questions in Committee if the Government are to justify that punitive measure.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Has my right hon. Friend focused his mind on whether that 10 per cent. supplementary tax will or will not qualify in relation to double taxation treaties where a number of the North sea explorers are subsidiaries of overseas multinationals?

Photo of Michael Jack Michael Jack Conservative, Fylde

I am grateful to my hon. Friend for putting that question, although it leads me into an area which now is not the time to go into—the whole question of the international competitiveness of investing in offshore activity in the United Kingdom.

My third point relates to capital gains tax. When the Government came in, they changed the capital gains tax regime with their complex taper measures, making the express argument that the longer one held an asset the better it was and the more virtuous it was. Now, they are touting it around that two years is the chosen period during which one can achieve a very low rate of capital gains tax. That is quite remarkable. If the Government are the sinner that repenteth, where is the analysis that suddenly states that to get a 10 per cent. effective rate in two years is a good thing, whereas when they first introduced the tapered tax the period was significantly longer? Why not go the whole hog and get rid of that complex, unnecessary part of capital gains tax? If people could move their capital quickly on to more profitable activity, I cannot but believe that that would be an engine for growth.

That is another example of where, instead of undertaking cost compliance modelling of their tax proposals, the Government should produce a well argued business case. Too many of the Government's proposals on tax are based on ideas that have no justification in fact. It is clear that the long-term, up-to-10-year taper had no economic justification, just as the two-year period is not justified—so why not zero?

The Red Book contains some further heroic work on oil fraud strategy. I welcome the proper working of the tax system and the proper collection of revenue, but how on earth are the figures in the Red Book to be achieved? The oil fraud strategy starts off at £100 million in 2002–03. In 2003–04, we suddenly find ourselves nearly three times better off and then there is a gargantuan leap to £550 million—half a billion. In 2004–05, we shall be five and a half times better at getting that money in than we were in 2002–03.

How is that trick to be pulled? What is the extent of the oil fraud that is going on? The House needs more convincing details, especially from a Government who are confronting a National Audit Office report that states, in paragraph 5.8 of its summary, that we face a VAT fraud bill of between £6.4 billion and £7.3 billion. Where is the analysis of what the Government have been doing to try to ensure that that missing money was collected? That sum is the equivalent of at least one year's increase in the national insurance charge. That is a major leakage. I want to be convinced that the Government are not merely publishing heroic figures and that the Red Book contains justification for the claim that such a huge sum of money can apparently be raised through the oil fraud exercise, even though there is no mechanism for doing that.

I am sure that we shall have many interesting and detailed discussions in the Finance Bill Committee. I hope that it might be possible for me to make a modest contribution to them. I also hope that when we debate the individual measures, the Government will, for once, give us much greater insight into what is going on and into the justification for the measures that they propose. I hope that the Government will not merely use their Committee majority to bludgeon through tax measures without giving us a thorough and proper explanation of what those measures are, what they do and how they will work. The Government must convince us that—unlike the film industry tax measures—they will actually work.

Photo of Bob Blizzard Bob Blizzard Labour, Waveney 6:39 pm, 30th April 2002

I cannot pretend to have the same breadth of knowledge and experience of Treasury matters as Mr. Jack, but I hope that I have some understanding of the issues involved in one part of the Bill. However, before I come to that, I want to say that, overall, the Budget was a good one, and therefore this is a good Bill.

I strongly support its three main thrusts. The first of those is investment in the national health service. The second is support for those who work, especially those on lower incomes and those with children, although not only those with children. I welcome the redistributive—I had almost forgotten how to say the word—nature of the measure. In a society of high or full employment, work is the best form of social justice. I am also pleased by its third thrust: further measures to encourage enterprise, especially among small businesses, which employ most of the people in the country and in my constituency.

All our plans for investment in public services and social justice for poorer people, children and the elderly require a strong economy; the Chancellor's judgments over the last five years have given us that strong economy. I do not doubt his judgment that our economy is in good enough shape and the labour market strong enough to withstand the 1 per cent. increase in employers' national insurance contributions. With such a powerful record, one hesitates to call into question any aspect of the Chancellor's judgment, but I think that he has got it wrong with one measure in the Bill. In fact, it is so wrong that, in the medium and long term, I believe that it will have a negative effect on a key sector of the economy through lost investment and employment. Over time, the measure will produce less tax revenue, not more, and will add to our problems on energy policy. That policy is already the subject of the performance and innovation unit report, which offers the Government some difficult decisions to make.

I refer to the proposed changes to the fiscal regime for North sea oil and gas. At first sight, taking £600 million and upwards from oil companies' profits might seem easy pickings—it does not look like a vote loser among the general public. I question this judgment, however, as I fear that it will have a profound effect on one of the country's most important industries—an industry that has accounted for 18 per cent. of total UK industrial investment over the last decade. I look at it in terms of what is in it for UK plc, not for the oil companies themselves and I do not like what I see. I will not argue that oil companies are unable to pay more tax when the oil price is high; it is currently $26 a barrel according to this morning's paper. The price stood at more than $30 a barrel 18 months ago, but it is not always high—it was $10 a barrel four years ago. The only certainty about the oil price is its total unpredictability.

The real point is that the companies about which we are talking can make money by investing in activity anywhere in the world, because there is a world price for oil. As I represent a constituency in which the oil and gas industry is a major part of the local economy—that is why I chair the offshore oil and gas industry all-party group—I want that investment to be made in the UK continental shelf for as many years as it is technically possible to exploit the reserves. We need to remember that innovation is expanding the technical capacity all the time, and much of that innovation is British. The investment that we get means jobs, a safe and secure energy supply, and, with natural gas, environmental benefits. It also means continued tax revenues. We have so far had, for our benefit, £175 billion of tax revenues since oil and gas were first discovered in the North sea. I fear that the new extra 10 per cent. tax will drive away some of that investment.

We must understand the nature of this industry. It is truly global in its investment pattern, and each multinational company operates in that way. There are lots of places in the world where oil and gas can be exploited, and capital investment patterns and plans can easily be redirected, albeit with a long lead-in time. It does not have to stay rooted in one area because that is where its skilled work force are; as we know, the work force are highly mobile. The product itself can be moved readily around the world, although nearness to market is of some advantage in relation to gas. The investment can therefore easily be made anywhere in the world where oil and gas are found, and more reserves are still being found year by year.

We must face up to the real truth—on a world scale, the North sea is not particularly attractive in terms of competing for further investment. It is what we call a mature province, with only small and technically difficult fields left to exploit. Those fields are called marginal fields—the costs of producing from them are comparatively high in world terms.

When the Treasury carried out the review of North sea oil and gas taxation in 1997–98, it produced figures from consultants showing that, by international comparison, we had a low-tax regime in the United Kingdom. Those same consultants also showed at the same time that the North sea had the highest costs internationally. The Treasury eventually accepted that, and it called off the review. The threatened tax rise has now returned—not in a review but in a Bill.

It is still true today that the UK continental shelf is a costly place from which to produce. A recent study by consultants Wood Mackenzie—to which reference has already been made—shows that the weighted average unit cost from post-1999 developments ranked the UK continental shelf 58th out of 59 energy provinces around the world.

When oil and gas were first discovered here in the 1960s, it was thought that we had enough reserves for 25 years. Today, new fields are being worked on only because costs have been reduced and innovation put to use, but production reached a record level last year. We can go on for another 30 years, with all the benefits that we derive as a result, if we set the right conditions. My concern is that this measure does not help to set those conditions.

We do have some advantages internationally in competing for investment. There is a good market for gas all around the North sea, but our key advantage is stability—not just political stability, but financial stability. We should have fiscal stability, too.

Photo of Michael Jack Michael Jack Conservative, Fylde

The hon. Gentleman is making an extremely important set of points. Does he agree that, if the Government remain firmly in support of the proposal, it is very important that they make a detailed case for why they think that the UK offshore industry can bear more tax? In addition, they should provide some comparative data to address many of the international points that the hon. Gentleman is making.

Photo of Bob Blizzard Bob Blizzard Labour, Waveney

I look forward to seeing that information when it is deposited in the Library, which, earlier today, my right hon. Friend the Chief Secretary agreed to do.

The stability about which I am talking breeds confidence. That is the crucial factor in making high- magnitude, extremely long-term investments, which are the particular feature of the oil and gas industry. Because no one can predict the oil price, as much stability and confidence as possible is required in the political system, Government policy and the fiscal regime. This country has enjoyed that advantage; indeed, it is our best advantage. Of course, only one thing undermines that advantage more than making a big change—doing so in a surprising way. Last week's announcement took me and the industry by surprise because it was so inconsistent with previous policy and other current Government policies.

One must question the Government's judgment because the policy is inconsistent with that of the previous five years and with the lessons that we appeared to learn from that previous policy. When Labour took office, a review of the North sea fiscal regime was announced. That in itself created uncertainty, and we saw levels of investment in new projects fall markedly. Then—this is not especially connected—the oil price fell and stayed at $10 a barrel for some time. Consequently, when the review was abandoned, people wondered whether it was because of the low oil price or because there was a recognition of the issues relating to maturity of the province—field size—about which I have spoken tonight. It took some time for the industry to be convinced that it was the latter reason. The Government's decision to set up the oil and gas industry taskforce, and, subsequently, Pilot helped the industry to be convinced.

Through that initiative the Government and the industry worked together—Treasury officials were included on the Pilot committee, which was an unprecedented and very welcome move—and my hon. Friend the Minister for Industry and Energy acted as chairman. Through Pilot, a future was mapped out with targets for the industry to achieve. That worked. Last year, 21 new field developments were approved and £4 billion was invested, which was above the target that Pilot had set. Together with the £4 billion of operating expenditure, that investment supports 265,000 jobs in this country, many of them in communities such as my own.

It helps to get a grip on such figures if we consider that, when £50 million or sometimes £30 million is invested to set up a new factory to make semiconductors, that makes national news. It is great and fantastic news, but the sums in the oil and gas industry dwarf those figures.

Confidence was also restored because of the statements that were made. For example, in the pre-Budget report for 2000, my right hon. Friend the Chancellor resisted calls for a windfall tax when we were in the eye of the storm over fuel protests. He said:

"It has been put to me that North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make short-term decisions based on short-term factors. The key issue is the level of long-term investment in the North sea. This will be the approach that will guide Budget decisions in future."—[Hansard, 8 November 2000; Vol. 356, c. 317.]

That statement quite rightly recognises the greater prize of long-term investment.

Many of us on the Back Benches told the industry, "If you want to avoid a windfall tax, invest." It did that but, arguably, the measure in the Bill may be worse than a windfall tax. The industry will be able to pay if the price of oil is $26 or $30, but what will happen if the price falls to $10? I am concerned that the proposal will affect medium and long-term plans for investment. At the moment, the industry always runs a project through to see if it will work by assuming a price of $16 or $18, but it will now have to add 10 per cent. to that figure. I therefore worry that fewer projects will compare favourably with those in other parts of the world. I am surprised by the proposal, because it is inconsistent with one of the key principles for which I admire my right hon. Friend, namely stability.

Less investment in the North sea will have an effect on jobs. Many of those jobs are concentrated in coastal communities, especially those on the east coast such as mine. Those jobs are not easily replaced, because few industries choose coastal or more remote locations. It is difficult to attract businesses to such areas. I invite my right hon. and hon. Friends in the Treasury to consider the league table for unemployment in travel-to-work areas. Most of the top 20 communities in that table are coastal communities. Many towns—especially those with fabrication yards—have already had to deal with job losses in smaller-scale oil and gas activities that have resulted from cost reduction and replacement by innovation.

Let us get it straight. The measure does not mean that the industry will pack up now. We expect committed projects to be seen through and there may still be future projects. However, I fear that there will less exploration and less development of new projects. There will be less frontier and leading-edge work in finding innovative and cost-effective solutions. That has another downside. The expertise that the industry has developed in harsh conditions is recognised throughout the world and is very exportable. One of Pilot's targets is to increase such exports. However, the measure will damage the prospect of that, and it seems inconsistent with the proposal to extend research and development credits with which most Members agree.

Pilot faces a very difficult time. Many of those who have invested a lot of time in it have strong feelings about a surprise tax that seems to run counter to what the industry and the Government have been working towards together. I am concerned that the measure will only hasten the demise of the North sea oil and gas industry and not extend its life, which is what Pilot is all about.

How does the measure join up with energy policy? My hon. Friend the Minister for Industry and Energy recently said that our policy is to

"squeeze every last drop of oil and gas out of the North Sea."

That was the mission of Pilot, and it is the right policy. It is good husbandry of natural resources to get everything possible out while we have the infrastructure in place. The policy is also important in terms of having a safe and secure energy supply. Let us also remember that natural gas has helped more than anything else to achieve our Kyoto environmental targets.

The energy review shows that there is an upcoming gap in energy supply that will result from the forthcoming closure of nuclear power stations and from the natural decline in gas production from the mature fields that I have described. We are starting from a long way back with renewables and the coal industry, sadly, seems to be on its last legs. We surely do not want the gas gap—if I can call it that—to be bigger than it need be. I fear that gas that could be recovered will not be recovered if the investment needed to exploit it is directed to more attractive parts of the world as a result of this measure.

I ask the Government to reconsider. We must all contribute to funding the national health service but another 10 per cent. on top—a 33 per cent. increase—is quite a lot. As the right hon. Member for Fylde pointed out, the debt needed to finance projects will no longer be deductible against the new tax, and that will further raise the cost of financing North sea projects. Could not the tax be reduced or the finance charges be made deductible? Recent investment should certainly be exempted from the supplementary tax; otherwise the investment that has arisen as a direct result of Pilot and Government policy will be penalised. That does not seem right.

There is a good proposal in the Budget to abolish the oil royalty, but that only slightly offsets the new tax. It will not overcome the fears that I have expressed today, but I hope that we will not spend a year consulting about it. I hope that the Bill will repeal the royalty as I am sure that the technical details can be sorted out quickly. Capital allowances of 100 per cent. are good, but they will kick in only if the industry has the confidence to go ahead with new projects and if it feels that it will receive a return in the long term and that there are no more surprises around the corner.

Our Government's greatest strength is that they have looked to the long term. I ask right hon. and hon. Friends in the Treasury to look to the long term when they consider North sea taxation. If we can extend the life of the province, the Treasury and the taxpayer will gain too. I wonder whether I can appeal to the Treasury's most basic instinct to amass the revenue that it needs to bring about our mission to improve public services and to bring about social justice. My argument is that, in the long term, we shall receive more tax revenue through doing something else—or perhaps leaving things as they are—than we will from the measure in the Bill.

Photo of Andrew Mitchell Andrew Mitchell Conservative, Sutton Coldfield 6:57 pm, 30th April 2002

Mr. Blizzard made an eloquent and powerful speech. I know that the Chief Secretary to the Treasury heard most of it, but he did not hear the first part. I hope that the right hon. Gentleman will read the speech, because the hon. Gentleman made important points on behalf of the North sea oil industry.

I draw the House's attention to my entry in the Register of Members' Interests and, in particular, to the fact that I am a director of the investment bank, Lazard.

I shall have several disobliging comments to make about the Bill, but I wish to start by making it clear that, during my enforced sabbatical from the House, I watched the Chancellor's first five Budgets from the City. It has to be said that the right hon. Gentleman is highly respected in the City for those Budgets. His prudent phase was highly respected on three grounds in particular.

The first is that he gave independence to the Bank of England. I can say with honesty—it is recorded in Hansard—that I was in favour of such a measure 10 or 12 years ago when the Conservative party was against it. Giving the Bank its independence was a brilliant move. The economy is still benefiting from the wisdom of that decision. I have always been opposed to allowing itchy-fingered interventionist politicians to get their hands on the levers of interest rate policy. It is much better to leave them to the structure that the Chancellor has put in place. I thoroughly support that.

Secondly, the Chancellor is respected in the City because he read the crisis that took place in the Asian economies in 1997–98 correctly. Commentators, bankers and economists all said that the crisis presaged a systemic failure in the world economy that would ripple across Russia, creating defaults there and would intensify great difficulties in Japan and problems in America. We were all wrong. The Chancellor was correct, and he earned enormous praise.

Thirdly, the Chancellor has won great respect in the City for his work on third-world debt relief. He built on progress made under the last Conservative Government and has taken a major step forward.

The Chancellor's first five Budgets—the Budgets of prudence, which I missed—were extremely good. The present Budget and Finance Bill were introduced against an encouraging international background. The United States is coming out of recession with an incredibly robust economy, and the United Kingdom will clearly be bolstered by that. Rates here will inevitably have to rise in future, but probably not before the end of the year. The Budget and the Bill have therefore been introduced against a comparatively benign and certainly improved economic background.

Turning to the Bill, I agree that the Government are right to take another look at arrangements for domicile. It is offensive that a hard-working doctor in Sutton Coldfield earning £60,000 or £70,000 a year should pay 40 per cent. tax and national insurance, but a senior City professional living in London earning 10 times as much or even more should pay no national insurance and very little tax. Nevertheless, we operate in a tax-competitive market; many of the finest people who operate in such a regime can operate anywhere. When the Government look at that regime and the issues involved, they will have to bear in mind the fact that the City of London, with its enormous strengths, gains additional strength from its tax-competitive position.

The Government operate within a global economy, as the Chairman of the Treasury Committee and my right hon. Friend Mr. Jack made clear. It is difficult for Governments to work within that framework. The economy of London has more in common perhaps with New York than with Sunderland. Much of the top end of the London property market is driven by non-UK concerns and the global economy, presenting a serious challenge to Governments wishing to tax it effectively and treat it aright. Nevertheless, it is right that the Government should take another look at that. I also welcome their measure on VAT simplification.

I shall now turn to the reasoned amendment and make some critical comments about the Bill. The 500 pages of new legislation published seven days ago for the House to examine underline the fact that, despite his many virtues, the Chancellor is a compulsive meddler, changing things that he has already changed. The Liberal Democrat spokesman mentioned the Budd committee, a sub-committee of the tax law review committee created by the Institute for Fiscal Studies, upon which he, Ross Cranston and I served. During my time on that committee, I heard a number of practitioners talk about the way in which we scrutinise Finance Bills and about the effectiveness of Finance Bill Committees, and was struck by the inadequacies of the way in which legislation progresses as Parliament becomes virtually a rubber stamp.

I served on five Finance Bill Committees—several with the Financial Secretary to the Treasury back in the late 1980s and early 1990s—and I believe that we must be self-critical in appraising the usefulness of the work done in Committee. If Parliament is to have a serious influence on the development of Finance Bills, it should certainly look at the suggestion of my right hon. Friend the Member for Fylde about establishing a Standing Committee on taxation. If it is to be involved in consultation, it should be involved at an early stage. I put it to the Chief Secretary that there is merit in having much more extensive debate after the pre-Budget report in November, perhaps even sacrificing a day or two from the spring part of the annual cycle, so that the Treasury and Treasury Ministers can listen to Members on both sides of the House during their consultation, rather than Parliament's putting in time and effort now.

If Parliament is to be effective, it must be able to call expert witnesses. The Budd committee looked at whether there could be a Committee of both Houses. If the Government are unwise enough to proceed with their proposals for an elected second Chamber, perhaps that would remove some of the objections to a Joint Committee. The Budd committee questioned the extent to which Members of Parliament are willing to influence, or interested in influencing, the development of the tax regime. A challenge for everyone in the House is whether we can make any difference to Finance Bills when they reach this stage in their progress. I hope that the Government will seriously consider having a much more detailed debate on their proposals in November. They have been pretty generous and good about putting tax changes out to consultation; in this round, there were three specific areas on which there was extensive consultation with practitioners and professional bodies, which I welcome. The more that can be done, the better, if we are to have more effective consultation and introduce better tax legislation as a result.

The amendment also deals with the burden of taxation. The House does not reflect strongly enough on its deep responsibility to justify every penny of taxation taken off the hard-working taxpayer. The burden of taxation since 1997 has increased enormously. There were approximately £270 billion of tax receipts in 1997, and we are now heading towards the staggering figure of £400 billion, which is a massive increase. Many people question the extent to which they are getting value for money. I do not wish to rehash points made in the Budget debates about spending on health care, transport, and law and order and tackling crime, but many people wonder whether they get value for money from the enormous amount of taxation that is raised. Looking at the Chancellor's assumptions about growth in the Budget and reading what the Item—independent Treasury economic model—club said, I wonder whether, after five prudent and sensible Budgets, this Budget is the other side of the coin and in due course will be seen as reckless.

The Chief Secretary is the taxpayer's guardian. The enormous amount of taxation—every penny of it—must be justified to people who pay it. The House should be a great deal more careful to honour its duty to justify taking large amounts of money from hard-working people.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

Does the hon. Gentleman not recognise that headline tax figures alone do not reveal the whole story? Is he aware that even with projected increases over the next three or four years, the total percentage of tax as a percentage of gross domestic product will be lower in 2005–06 than it was at any point under the Conservatives?

Photo of Andrew Mitchell Andrew Mitchell Conservative, Sutton Coldfield

One can do anything with the figures, as the hon. Gentleman eloquently made clear. My point is unanswerable: huge amounts of taxation are taken off hard-working people, and have to be justified. It behoves the House to honour that duty more often than is usually the case in our debates. Looking at the enormous amount of money recently loaded on to tax on income, we can only reflect on the fact that on the "Today" programme, on television in interviews with Mr. Dimbleby, and on page 10 of the last Labour manifesto, the Government made it clear that they had no intention of raising taxes on income, which is precisely what they have done. We can debate that, and the electorate will cast their judgment in due course. I merely point out that the Government have passed draconian and largely commendable legislation on the financial services industry, and that if they had issued a prospectus on tax on income, they would now be in serious trouble with the Financial Services Authority and would have got into hot water for producing such a misleading document.

A great deal of extra money is to be spent on health care. The Government are guilty of a massive dereliction of duty in their failure to put the reforms in place before they put in the extra money. It is astonishing that the money should be provided as it has been. The leverage for getting the reforms that are desperately needed in the health service has been thrown away because of the way in which the matter has been handled.

The Government will live to regret the fact that they have missed out on the key economic lesson of the past 50 or 60 years: that it is competitive, decentralised markets, not monopolistic, tax-financed institutions, which deliver for consumers. The NHS is not about a set of buildings or a set of staff. It is about a set of values. It is about being free at the point of need—[Interruption]—but the debate about whether or not the provision of health care should be private is a ridiculous debate.

Those on the Labour Benches continually go on about the fact that the Conservatives have yet to produce their plan on health. They will have to wait for that. We are serving the public and the taxpayer well by ensuring that we look around the world at all the other ways of delivering health care, and that we come back and give our plans to the House when we are good and ready, not as part of the ebb and flow of debate with the Chief Secretary.

Photo of Kevan Jones Kevan Jones Labour, North Durham

I am grateful to the hon. Gentleman for giving way. If I were a member of his Front-Bench team, I would be very worried about him. He congratulated the Chancellor on his first five Budgets, supported health care free at the point of delivery, and suggested that taxation on City investors should be higher than that on doctors—a radical suggestion. The hon. Gentleman is welcome to join us. Does he agree that extra money is needed for the health service, or is he saying that the health service that he wants, as we do, free at the point of delivery, is possible with the current amount of money available—yes or no?

Photo of Andrew Mitchell Andrew Mitchell Conservative, Sutton Coldfield

On the first point, I can assure the hon. Gentleman that I would rather have my toenails pulled out without anaesthetic than cross the Floor to join him.

On the second point, I am making a serious point. Given the enormous increase in taxpayers' money that is to be spent on the health service, and my lengthy comments about showing respect for the taxpayer, it is right to examine delivery mechanisms, and the Government have made a terrible—indeed, a catastrophic—mistake in the way in which they have gone about providing the extra money, without having first put the reforms in place. I reiterate that it must be right for a responsible Opposition to study carefully all the other mechanisms around the world before deciding which is the right one to put before the British people at the next election.

Photo of David Laws David Laws Shadow Spokesperson (Defence)

I am grateful to the hon. Gentleman for giving way a second time. He has honestly acknowledged that his party does not yet have proposals for funding the NHS. Is he seriously suggesting, as was suggested from his Front Bench, that no additional money should go into the NHS while we wait for the Conservative party to go round the world and find a better funding solution?

Photo of Andrew Mitchell Andrew Mitchell Conservative, Sutton Coldfield

Those on my party's Front Bench have made it clear that additional money and resources will be needed for the health service. There is no question about that. The hon. Gentleman and his party will have to wait for the proposals to come before the British people and the House of Commons, but I can assure him that when they come, they will be well worth examining.

Before I leave the subject of health, I shall make two other points. First, if one examines the highly respected research conducted by the company Dr. Foster, one can see that there are such enormous differences in the quality of health in different parts of the country—sometimes as much as a 76 per cent. variation in the likelihood of results between one hospital and another—that one cannot ignore the argument that systemic change is required in the health service.

Earlier in the debate we heard about cancer survival rates in this country, which are below those of Turkey. That is why I particularly resent the accusations from Labour Members that the Conservative Opposition are wrong to examine in great detail and depth the lessons to be learned from overseas so that we can give all our citizens a better health service in the future.

The third part of the reasoned amendment deals with the effects of the Finance Bill and the Budget on business and competitiveness. We were told throughout the Budget speech that this was a Budget for enterprise. The word "enterprise" was used so often by the Chancellor that by the time he sat down we all knew that that was certainly not true. The Budget is a tax on jobs. No doubt that will be discussed in detail tomorrow, but the CBI and many others have learned a valuable lesson about the Government. The effect of the changes will be to remove incentives to employ. The CBI said recently that of all our major trading partners, only France has a higher burden of business costs imposed upon it.

The reasoned amendment mentions the "negative impact on competitiveness." You can say that again, Mr. Deputy Speaker. The UK has fallen from ninth in 1997 to 19th in the world competitiveness league. Before 1997, when the Conservative party was in government, UK productivity growth was faster than in the United States. Under the present Government it is slower. Our share of world exports has fallen by more than 10 per cent. since 1997, according to the International Monetary Fund. Last year business in Britain faced more than 4,000 new regulations. A business-friendly Budget this certainly is not.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

I thank the hon. Gentleman once again. I am enjoying his list of non-achievements on the part of the Government. Perhaps he would like to add, or perhaps he is not aware, that last year the British economy grew faster than any economy in the G7.

Photo of Andrew Mitchell Andrew Mitchell Conservative, Sutton Coldfield

That adds nothing to my list. If the hon. Gentleman is disputing any of the five facts that I gave him, which demonstrate that under the present Government the performance of business in the UK and the difficulties faced by business in the UK are much worse under the Government whom he supports than under the Government of whom I was a part, perhaps he would like to challenge those figures. He cannot do so, which is why he remains seated.

The Finance Bill adds 500 pages to tax law. It is complex, meddlesome and burdensome to the taxpayer without giving value for money. It is hostile to business, bad for enterprise and destructive of competitiveness. It marks a sea change in the way in which the Chancellor will be perceived in the future, as compared with the way in which he was perceived in the past. I look forward to voting for the reasoned amendment tonight.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 7:17 pm, 30th April 2002

It is always a pleasure to follow Mr. Mitchell—I often follow him on the Select Committee. I salute his contribution. It is hard for Opposition Members, particularly Conservative Members, to say very much about the current economic situation and the Budget because the economic indicators are so strong. We have high growth, low inflation, low interest rates and high employment.

Mr. Bercow, who is no longer in his place, mentioned the complexity of the Budget. He referred to the 1979 Budget—the first one presented by the incoming Conservative Government. The 1979 Budget was part of a process that led to 3 million unemployed, so short Budgets are not necessarily a good thing, as the hon. Gentleman suggested. I knew that I had many differences with him, and I have found another. He stood up in the House and said he hoped that he was still growing; I hope that I am not.

A measure of the difficulty in which the official Opposition find themselves is the wording of the amendment, which suggests that the Budget

"will have a negative impact on competitiveness and the attractiveness of the UK as a location for investment."

Implicit in that phraseology is a recognition by the official Opposition, and rightly so, that we are a competitive economy and an attractive place in which to do business. We on the Labour Benches want to further that process.

I shall focus on productivity. When my right hon. Friend the Chief Secretary to the Treasury opened the debate, he mentioned that capital investment—business investment—had gone up from 10 per cent. of national income to 14 per cent. of national income. That is to be applauded because productivity rests, like a three-legged table—a three-legged table should not wobble, nor should productivity—on capital investment, on research and development and innovation and on labour force investment.

It is interesting to consider some of the statistics on productivity—I will not bore the House with many—to show that we have some way to go, but that we have also made considerable progress under this Government. The hon. Member for Sutton Coldfield mentioned the high burden of business taxation in France. According to the productivity figures for 2000, if the United Kingdom is taken as 100 on an index, France is at about 118, the United States is at about 139, Germany at about 105 and, interestingly, Japan is at about 98. Japan and the US are low-tax economies. France is a relatively high-tax economy, as is Germany. We are a low to middling-tax economy, so there is no direct link between taxation and productivity.

On our productivity gains, one of the publications issued with the Budget—"Trend Growth: Recent Developments and Prospects"—shows the trend in the United Kingdom's underlying productivity growth measured as output per hour. From quarter 2 of 1986 to 1997, the figure was 1.84. From 1997 to mid-1999, it was 1.55, so there was a fall when the Labour Government stuck to the out-going Conservative Government's spending limits. From mid-1999 to quarter 3 of 2001, the figure was 2.4, so there has been an increase in productivity under a Labour Government. That is extremely important, and we should make further progress, as the Budget will do.

I urge the Government to consider one difficulty with productivity with which we have not yet grappled. In the submission of the National Institute of Economic and Social Research to the Select Committee on the Treasury, the report of which was mentioned a great deal earlier, Mary O'Mahony refers to the difficulties of measuring public sector productivity. It is obviously particularly important to grapple with that difficulty, given that a huge amount of extra resources will go into the national health service. Although those resources are very welcome, we ought to be able to measure any growth in productivity in the public sector, particularly in the health service, so that we know whether we are getting the right bang for the buck from the increased moneys.

I welcome the reduction in the Budget in some of the red tape faced by small business. One of the major headaches for small business is, of course, VAT returns, and the Budget addresses that issue. That will help productivity in the small business sector. It is very difficult to tell whether the increase in employers' and employees' national insurance contributions to fund the change that we need in the health service will have a positive or a negative effect on productivity, but mention has been made of what the effect on employment may be. Of course, if labour is made more expensive in a capitalist economy, capital tends to be substituted for labour, which tends to increase productivity in that economy.

I particularly welcome the changes on research and development in clause 52 and schedule 12. We need more research and development to push forward this country's productivity. We have historically underperformed in that respect. The Finance Act 2000 included tax breaks for small and medium-sized enterprises. Those tax breaks are now coming on stream for larger enterprises. We should be clear how beneficial those changes could be. As I understand that clause and schedule, a large company, like a small or medium-sized enterprise, that invests in research and development will in effect get 125 per cent. of the money back. It will get the 100 per cent. write-off, plus a 25 per cent. premium, against its profits to encourage that activity.

I welcome the fact that that proposal will cover qualifying bodies, such as Wolverhampton university in my constituency. Those bodies will be able to carry out research for larger enterprises, which will be able to claim that tax break. That will encourage large enterprises not only to carry out research and development in-house, but to farm it out to appropriate qualifying bodies, whether they be universities, charities or whatever.

I hope that some of those productivity gains and the advances in research and development will encourage business in this country to invest in two areas where we have been missing the boat. I have told the House about them before, and I think that I did so when I spoke on Budget day. The first area is the design and build of medical equipment, and the second is the design and build of pollution control equipment. We in the west midlands could well do with playing our part in those markets, which are growing in this country and abroad.

I have a minor request to make of the Minister. I am not an accountant but a non-practising solicitor, as my entry in the Register of Members' Interests shows, so I should like to know more about what happens when a company spends money on research and development and claims for staffing costs and consumable stores. I traced that provision back from the Bill to the Finance Act 2000, which introduced that research and development tax break for small and medium-sized enterprises. One of the schedules to that Act simply states:

"For the purposes of this Schedule expenditure on consumable stores means expenditure that would be treated as expenditure on consumable stores in accordance with normal accounting practice."

I was stumped by that and did no further research, so I hope that the Minister can enlighten me at some point about what that means. That request is not frivolous; it is intended to shed light on what can be claimed against that tax break. I do not know whether a claim could be made for a spectrometer. Would a spectrometer count as a consumable store, or as capital goods?

I should also like to make some remarks about another issue that is central to productivity: the skills of our work force. We need the skills to carry out the research and development to which I refer. We need skills to boost productivity—I read out some figures earlier. As hon. Members on both sides of the House will agree, we need to move to a high-wage, high-skill economy.

We need to develop skills to address the skills shortages that have developed for two reasons. First, the Conservative Government neglected to invest sufficiently in skills training. Secondly, although unemployment has dropped to a relatively low level under the Labour Government in the past five years, there are pockets of skills shortages throughout the country, especially in the south-east.

I am pleased that the Budget and the ancillary documents refer to pilot schemes under which, initially in six areas of the country, small employers will be paid to send their workers on training courses. Paragraph 3.34 of "Developing Workforce Skills: Piloting a New Approach"—one of the documents released with the Budget statement—states:

"Pilots will provide small firms with financial support of up to 150 per cent. of the average wage costs of low-skilled staff for the required period of time off."

That time off will be used for training.

I wholeheartedly support that push to encourage skills training; it is a part of the Budget that has been under-remarked upon. Lower-skilled workers tend not only to earn less but to be less productive. Paragraph 1.10 of that document states:

"Research at the worker level finds that holding a tertiary qualification (e.g. a degree) in the UK increases productivity by between 30 and 100 per cent. when compared to a worker with no qualifications."

That would be a massive productivity gain for our economy. We hope to push forward on that with the Government target of getting 50 per cent. of that age cohort into university by 2010. That should have huge gains for future productivity, directly and indirectly.

I welcome the sector skills councils that are being set up throughout the country to increase skills training and productivity. Box 2.1 of the document from which I have just quoted says that they

"will be strategic bodies with the sole purpose of identifying the skills and productivity needs of their sectors and galvanising action to tackle priority issues."

Ancillary to that, I welcome the Employment Bill now going through the House and on whose Standing Committee I served, under which trade union learning representatives will be given time off, paid for by their employers. That is a step towards encouraging a learning culture, which, in due course, will have increasingly beneficial effects on productivity in our economy as well as enriching the lives of the people who undergo that education and training.

I should like the Government to consider the sort of tax break for training that they have given for research and development—the 25 per cent. premium in addition to writing off 100 per cent. of training costs against taxation. Effectively, there would be the same 125 per cent. regime for training in certain circumstances that this Budget introduces for research and development in large companies and which there has been for the past two years for small and medium-sized enterprises.

I finish with a quote from the Treasury Committee's report, which has already been used by my hon. Friend Mr. McFall. When the Government are criticised about targets, it is salutary to remember that we need real measures and to keep on top of them. The hon. Member for Sutton Coldfield mentioned that indirectly in terms of the health service. Paragraph 21 states:

"We remain concerned about UK productivity which has lagged behind that of the United States. We agree with the Budget's aim to increase the rate of growth of productivity and recommend that the effectiveness of the various measures included in the Budget for this purpose should be closely monitored and reported on in future Pre-Budget Reports and Budget Statements."

If, like me, one has a great desire to increase productivity in order to catch up with the United States, to continue pulling ahead of some of our EU competitors and to catch up with France, and so on, we need to be able to tell which measures are working and which are not.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 7:33 pm, 30th April 2002

It is a great honour to represent the City of London and to be speaking today for the first time on a Finance Bill. Times have changed from a bygone era, even on this day when many of us have dressed in our best suits for the event in Westminster Hall earlier today. Back in the post-second world war era, it was apparently de rigueur during Budgets and Finance Bill debates for Members of Parliament—in those days there were two representing the City of London—to wear large black top hats. My association deputy chairman, Jacob Rees-Mogg, the son of Lord Rees-Mogg, offered to borrow such apparel, but I decided that discretion was the better part of valour, at least on this occasion.

The more disparate nature of financial services in this era, certainly since the big bang in 1986, means that the City can no longer be said to speak with a single voice. In any event, my duty is to the residential population—the 6,000 residents within the square mile of the City of London. None the less, it is a great honour to be able to say a few words tonight on the Finance Bill as it affects the financial services and the business community.

My own record is as a small business man and I probably express the view of many who have a background in business in lamenting the detachment between the business and political classes—something that has been mentioned many times in recent years. I wish to speak briefly on two main aspects—enterprise and globalisation. It has been a much-vaunted if somewhat overspun goal of this Government to promote enterprise. Those words were used by the Chancellor of the Exchequer, and by the Chief Secretary earlier this afternoon.

I serve on the Standing Committee considering the Enterprise Bill, which is why I could not be here throughout today's debate, for which I apologise. That legislation is flawed in its rather overbearing regulation on merger controls and cartels, as well as in its somewhat simplistic analysis of the reform of insolvency law.

The Chancellor's instincts, as manifested in the sheer size of the Finance Bill, are all too often to complicate and meddle in taxation. As my hon. Friend Mr. Bercow made clear, the Bill is 488 pages long with 140 clauses and 39 schedules. It is a Budget for the most enterprising among the accountancy profession, but perhaps not for many more.

It would be unfair and churlish not to recognise that the Budget contained a number of positive changes, which manifest themselves in the Finance Bill. I support the cut in capital gains tax, from which I have benefited, having sold a business within a few months of entering the House. I also support many of the venture capital trust changes, which allow a merger and wind-up without losing the tax benefits. My hon. Friend Mr. Flight has become something of an expert on that issue, and I am sure he will refer to it in his comments later. Rob Marris rightly identified the credits that will be available for research and development, which are also to be supported.

Equally, there has been a downside for British business. All in all, we have had a tax-raising Budget and those taxes have been on jobs, making people more expensive to employ, with an attack on the oil industry and on foreign companies. I appreciate that the debate on national insurance contributions will take place at greater length tomorrow, but surely it would have been far better to have scrapped employers' national insurance and to have increased corporation tax rates. That would have simplified matters for companies, cut the compliance bill and encouraged employers to employ people.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

We have heard many warnings from Conservative Members about measures contained in this and previous Budgets impacting on the number of jobs. The hon. Gentleman may recall that the Conservative party claimed that the national minimum wage would destroy a million jobs, but in fact a million jobs have been created. Is not that a worthy point to take on board?

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

To claim that a million jobs have been created by the minimum wage is a rather large step to take. Other jobs may well have been lost. The minimum wage was set at a sufficiently competitive level, so a number of our concerns did not come to pass. Like many people in the mid-1990s, I ran a small business, albeit one in central London that paid even the lowest paid employees considerably more than any projected minimum wage. However, it is clear that jobs have not been lost. It is also well established that the Conservative party has changed its position on that.

With effect from 17 April, a new supplementary charge has been introduced on 10 per cent. of the profits of oil companies for the production of oil and gas in the UK and the UK continental shelf. Given the seat that he represents, Sir Robert Smith probably has deeper day-to-day concerns, but the City of London and the great number of international oil businesses based there will also be heavily affected by the provisions. It is a tax in addition to the standard 30 per cent. rate of corporation tax; it has rules similar to corporation tax, save that the financing costs will not be deductible. I suspect that the Financial Secretary will point out later that, as a sweetener, the Government have increased oil capital allowances from 25 to 100 per cent. and intend the matter to be subject to some consultation. However, the abolition of royalty payments does not appear to be taken into account in the Red Book, and the payments themselves are pretty small and affect only the older oilfields.

The United Kingdom Offshore Operators Association, which represents some 30 of the largest 70 licence holders that are active in the North sea, said that the new surcharge

"could undermine investor confidence in the long-term viability of the North Sea."

The policy comes at an especially crucial time, given the difficulties in the middle east. It will be interesting to see how oil supplies are affected by those difficulties in future years.

Shell Expro, the second biggest company in the North sea, which combines the operations of Shell and Esso there, said only a couple of weeks ago that although it welcomed the increased capital allowance and the possible phasing out of royalties—as I said, the latter affects only the older oilfields—they were

"not expected to come close to offsetting the supplementary charge" that would be put in place. A number of people have also been very concerned that the higher tax rate will result in fewer discoveries being commercially viable in the years ahead.

I should like to say a few words about globalisation, as financial and business services remain the powerhouse of the City's economy. They account for some 6.6 per cent. of the UK's gross domestic product and 600,000 new jobs are likely to be created in London in the next 15 years—if the Mayor of London is to be believed. On this matter at least, I have no reason to disbelieve him. More than 500 foreign banks will be active in the City and we would obviously wish those circumstances to be maintained.

The City relies on technology and massive labour mobility. The great worry is the flip side in a high-tax economy. We can attract the best workers world wide and, indeed, the crème de la crème of our graduates, but we must accept that work done in London can be done elsewhere increasingly easily, and will be relocated if the City ceases to be such an attractive place in which to do business.

Many hon. Members have spoken on a number of occasions about the severe infrastructure issues that central London faces. I spoke only a fortnight ago in an Adjournment debate on the future of Bart's hospital, which is obviously close to my heart. Likewise, there are transport issues relating to crossrail, the tube and the proposed congestion charge. There is a great worry that too many foreign banks that employ a highly skilled work force are fast reaching the end of their tether. The Bill contains measures that may tip some of them over the edge.

We have discussed controlled foreign companies—companies that are not resident in the UK, but are controlled by individuals who are resident here. Clause 88 provides for a reserve power to make regulations specifying overseas jurisdictions to which the exemptions from CFC rules would not apply. As a result, all CFCs located in those jurisdictions could be taxed under the controlled foreign companies rules. As many hon. Members know, Conservative Members voted against Budget resolution 41, which relates to that new measure. We are concerned that the measure will increase substantially the powers of the Inland Revenue. It is directed especially at the Crown territories of the Channel Islands, including Jersey and Guernsey, and at the Isle of Man, and concerns subsidiaries of groups whose headquarters are situated in the UK.

I believe that that matter has nothing to do with money laundering—a red herring that various Ministers and others have referred to—and relates solely to tax competition. The uncertainty that will result from the legislation will put at risk the UK's position as a future location for the headquarters of multinational companies.

There is also an issue in relation to UK branches of multinationals. I had wanted to deal in some detail with foreign companies that operate in the UK through a branch, as the matter obviously has a strong effect on the City of London. Such companies have long been able to debt fund their branches and thus obtain tax deductions for payments of interest to their foreign head offices. However, those rules are set to change. For accounting periods beginning on or after 1 January next year, the rules will be changed, as UK branches will be dealt with on the basis of the equity capital that they would need if the branch were an independent free-standing company.

That could have a major effect. I know that Ministers will be aware of the concerns that have been expressed and will have received a great number of representations in that regard, but as well as hitting the banking sector, which is clearly a big issue for the City, the measure will also add complexity to the tax affairs of a great number of multinational groups that have UK branches. Indeed, I understand that the Association of British Insurers said:

"There is a concern that the measure could also disincentivise foreign firms from being established in London, given the sums involved."

Given the precarious nature of the insurance market and of Lloyd's in particular, that would be a great problem.

A number of hon. Members mentioned growth, on which the Government's proposals seem unduly optimistic. In a sense, time will tell, but as my hon. Friend the Member for Buckingham pointed out, figures released only last Friday suggested that first quarter growth this year was only 0.1 per cent., which is much lower than the expected 0.4 per cent. and the projected growth of more than 2 per cent. this year and 3.5 per cent. next year, on which many of the Bill's spending plans were predicated.

I shall draw my remarks to a close, as I know that other hon. Members wish to speak. On the generality of the financial position in which the country finds itself, I accept as a relatively new Conservative Member of Parliament that it would be graceless not to recognise that the Chancellor often commands the Exchequer with great stature. I suspect that he may well be judged in the long term to have been in the upper ranks of holders of that office. Indeed, not to acknowledge that would be as graceless as many of the Front-Bench Treasury team have been in not acknowledging that they were bequeathed a golden economic legacy by the outgoing Government in 1997. They have built on that legacy. Many of us had great concerns in 1997—they were genuine, given the track record of many former Labour Governments—that things would fall apart very quickly. It is only right that a certain amount of credit should be given to the Government for having been able to marshal the economy as well as they have done in the past five years.

One must also accept, however, that the inheritance that the Government received in 1997 was the product of 15 years of often thankless domestic economic performance. Similarly, the work of the current Chancellor and the results of some of his much-vaunted changes to public finances in the past three Budgets—as well as the ones proposed in the Bill—will not become fully apparent until the first half of the next decade. While I am quietly confident that, by then, it will be my party that is sitting on the Government Benches, I am less sure that we shall not have to untangle an unholy mess in our country's finances by that time.

Photo of Wayne David Wayne David Labour, Caerphilly 7:47 pm, 30th April 2002

There are two clear themes in this year's Budget: fairness and enterprise. To the Labour side of the House, the fairness of the Budget is self-evident. We have unprecedented investment in the national health service, confirming its principles but at the same time ensuring that modernisation takes place. We have two new tax credits that will help the less well-off: the child tax credit and the working tax credit. Assistance is being provided to the long-term unemployed and single parents to help them secure long-term employment, and there is much else besides.

It is important that, taken as a whole, the Budget is progressive in character. Numerous references have been made to the Treasury Committee's report. It is important to note that the draft report states that the Institute for Fiscal Studies has calculated that, when all the measures are examined in total,

"the effect is a redistribution from the top half to the bottom half of the income distribution."

I think that that makes the Budget an historic one. It is an excellent Budget for that reason and many others.

It is significant that when we refer to the national health service, the Opposition fail to offer any alternative proposals. We have heard about their grand tour of Europe and their various experiences in different European Union member states. We can only hope that that infatuation will lead them to a more genuine appreciation of some of the benefits that the European Union can bring to this country.

If we have had a Budget for fairness, is it a Budget for enterprise? It is true that several employers' organisations have expressed reservations—for example, the CBI is worried that national insurance increases will be unfair on employers and impede job creation. In all fairness, however, we should bear in mind several factors. There is a moral argument in favour of increasing national insurance contributions. As everyone benefits from an improved national health service, it is only right that everyone contributes.

We must recognise the need, in economic parlance, for a healthy labour supply. Many employee absences in British industry are due solely to illness. In 1999 alone, £10 billion was lost as a result of the large number of people away from work because of illness.

We should not forget that in recent times the national insurance system has been reformed, nor that projections show that this country's gross domestic product growth will probably increase from 3 per cent. to 3.5 per cent. in 2002–03. That will lead to greater prosperity and, in turn, more jobs.

The Bill also contains a whole panoply of provisions that will encourage enterprise, including greater support for research and development, simplification of the VAT regime and reduction of red tape. Other measures will help those parts of the United Kingdom that are less prosperous than the south-east of England. It is therefore a shame that no Plaid Cymru Members are taking part in the debate.

Photo of Michael Weir Michael Weir Scottish National Party, Angus

The hon. Gentleman will know that the Scottish National Party and Plaid Cymru are a joint group in this Parliament, and I shall speak on behalf of both parties.

Photo of Wayne David Wayne David Labour, Caerphilly

That is a pretty lame excuse for Plaid Cymru's absence from the debate. I am talking not only about the present moment, but about the whole afternoon from 3.30 pm onwards, during which not one single member of the Welsh National party has set foot in this Chamber. That is a complete and utter disgrace, because parts of the Budget will help areas like Wales—for example, the community investment tax credit, which will help disadvantaged communities, and the positive changes to stamp duty, which will help small and medium-sized enterprises, including those in Wales.

The Budget as a whole is as much an enterprise Budget as a Budget for fairness. The two concepts go hand in hand. Over the past few years, an enterprise culture has been created throughout the United Kingdom—a culture that the Government are helping to nurture and to sustain at every opportunity. It has become part of the psyche of the nation, and long may that continue. The Budget takes a positive step further in that direction.

The Treasury Committee report refers to the European stability and growth pact. On the Budget deficit, Treasury forecasts show that public finances will be within the confines of the stability and growth pact in 2002–03, but there is a question mark over whether that will continue into 2005–06 and 2006–07. The operation of the growth and stability pact has already demonstrated greater flexibility as regards the attitude taken towards the position of Portugal and Germany. It would be useful if that flexibility were to be enshrined more permanently to create a more prudent and sensible approach. The growth and stability pact needs to be reformed to take account of the economic cycle, debt sustainability and investment expenditure. I am grateful that the Government have acknowledged that point, and that it is being addressed by the European Union through the Economic and Financial Affairs CouncilECOFIN. I hope that that debate will reach a successful conclusion.

Today in this country, 28.4 million people are in work and the lowest number of people are claiming unemployment benefit for 25 years. That is a record. The Labour party's goal is to achieve sustainable full employment. That goal can be achieved in the near future, and the Budget takes us closer towards it. In essence, the aim of the Budget is to create a country that is prosperous and compassionate. In other words, it is about fairness and enterprise.

Photo of Michael Weir Michael Weir Scottish National Party, Angus 7:56 pm, 30th April 2002

Scottish National party and Plaid Cymru Members welcome the central tenet of the Budget, namely that there should be more investment in the national health service and that it should come from general taxation. It is heartening to note that the Chancellor has finally accepted the position of the SNP, which has called for that for some considerable time. It is worth recording that in 1999, the SNP sought to reject the Chancellor's 1p cut in income tax and said that priority should be given to investment in public services. We were roundly condemned by new Labour at the time, but we seem to have come full circle. Indeed, I am told that some Labour Members are describing the measure as 1p for Scotland—vindication indeed.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

Can the hon. Gentleman confirm whether the 1p for Scotland policy will remain part of the SNP's manifesto at next year's Scottish Parliament elections?

Photo of Michael Weir Michael Weir Scottish National Party, Angus

As the hon. Gentleman knows, our manifesto for the Scottish Parliament elections will depend on matters within the Scottish Parliament, not on the Bill.

The Bill makes no change to income tax—it provides instead for a rise in national insurance contributions—but that is merely to spare the Prime Minister's blushes. All hon. Members know, as does everyone outside the House, that what has happened is a rise in taxation. The mental gyrations performed by Labour Members to justify that method of raising revenue have been a wonder to behold. In effect, it does not matter to the average employee whether the increase is in direct taxation or national insurance contributions—it is still an increase in the amount of tax that they pay.

That method of raising revenue has a serious impact. Clauses 30 to 32 impose changes in corporation tax, especially in relation to small companies. Although that is generally welcome to small companies, it does not address the needs of the vast majority of small businesses in Scotland, as more than 75 per cent. are not incorporated and therefore do not pay corporation tax.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

While the hon. Gentleman is talking about the effect of the changes on small businesses, and as he is speaking on behalf of Plaid Cymru as well, will he give his reaction to the response to the Budget by the CBI in Wales and the Trades Union Congress in Wales?

Photo of Michael Weir Michael Weir Scottish National Party, Angus

The changes to corporation tax will be beneficial to companies in many ways. When I asked the Chief Secretary about the difference between companies and unincorporated bodies, he gave a great deal of detail about the effect of the changes on companies. They will benefit, but the point is that unincorporated bodies will not. Far from being a Budget for business, it is a Budget for big business, as the Bill reveals.

Last week, in its Budget coverage, The Financial Times gave the example of Safeway in relation to national insurance contributions. It pointed out that because a large number—40 per cent., I think—of Safeway's employees were part time, they did not cross the national insurance threshold. A further 25 per cent. crossed it by so little that it made a marginal difference to the company. It makes a big difference to those enterprises with a small number of well-paid employees. That is often the case with innovative small businesses in Scotland, not least because of the difficulties that they experience when they seek bank finance.

Photo of Michael Weir Michael Weir Scottish National Party, Angus

No doubt that also applies to Wales. The two Labour Members from Wales may feel free to keep interrupting.

Unincorporated business receives no benefit from the reduction in corporation tax. Most small businesses will pay increased national insurance contributions personally and for their employees but will not receive the benefit of reduced taxation. They are therefore doubly penalised. That is patently unfair. By raising national insurance contributions, the Chancellor is not taxing profit, but increasing the cost to business, which must be met even if there is no profit. It is worth noting that the average self-employed business owner in Scotland makes approximately £14,000 per annum, compared with a UK average of £22,000.

Unincorporated business will not benefit from the change in the research and development grant.

Photo of Michael Weir Michael Weir Scottish National Party, Angus

No, I want to continue with the point. I suspect that the same problem affects small businesses in other parts of the UK, certainly in Wales. There will be increased costs but little benefit for small, unincorporated businesses. John Downie of the Federation of Small Businesses in Scotland said:

"The Chancellor has given a little but taken a lot."

The fiendishly complex system of tax credits may ameliorate the increase to some extent for the lower paid, but it is worth noting that since October 1999, the Chancellor has introduced five new tax credits for families, scrapped four of them and devised two new ones to take effect from April 2003. That was before the Budget changes. That is an average of a new tax credit for families every six months. Business complains that the complexity of the tax system increases its costs. That was one of the four matters that most disturbed businesses according to the survey by the Federation of Small Businesses. There is approximately £3 billion in unclaimed benefits largely due to the complexity of the system. As I said, that complexity means costs for businesses.

By going down the national insurance route, the Chancellor has also effectively reduced the amount that will be invested in the NHS and other public services. It should be remembered that the NHS is a major employer. A large proportion of its costs is wages and salaries. All will be subject to the changes to employers' national insurance contributions and some £26 million every year will be taken out of the NHS in Scotland and given back to the Treasury. Local authorities will pay more than £35 million. Overall, we calculate that the cost to the public sector will be £1.2 billion.

Photo of Michael Weir Michael Weir Scottish National Party, Angus

No, I shall not give way on this occasion.

I want to refer to some specific clauses. Clause 90 changes North sea oil taxation. I am not sure about its effect in Wales, but it will make a great impact in Scotland. The changes in royalties are largely red herrings because they affect only pre-1982 fields. The new 10p tax is more important and could have a detrimental effect on employment in the North sea, especially on the utilisation of marginal fields. Earlier, Mr. Blizzard made the good point that many fields in the North sea are marginal. Indeed, the UK Offshore Operators Association said that the changes

"could undermine investor confidence in the long term viability of the North Sea."

In constituencies such as Angus, there is substantial employment in the offshore oil industry and there are worries about the possible knock-on effects of the changes on employment. Has the Financial Secretary considered the new regime's effects on North sea oil jobs? Mr. Jack is no longer in the Chamber. He asked for the business case for the changes to be placed in the Library. It would be interesting to read it.

The Government are ushering in a substantial change in a vital industry, apparently without undertaking any public-economic assessment of its effect on the 264,800 jobs that depend on the industry. The changes will reduce industry net cash flow, and that will have a negative effect on exploration, which is already low. Exploration and appraisal have decreased by approximately 55 per cent. since 1996. We tabled an amendment in the debate on the Budget; alas, it was unsuccessful, but we may return to it.

The Chancellor must know about the huge damage caused to the rural and remote parts of Scotland by the high cost of fuel. The Budget did not increase fuel duty, but froze it. That is cold comfort to those who experience steadily rising prices. The most cynical among us—that must include most of us—wonder how much of the new 10p North sea oil tax will be passed on to consumers at the pumps. Fuel duty may be frozen, but taxation of fuel may effectively rise. Will the Financial Secretary take any action to ensure that it is not passed on to customers in rural petrol stations?

Perhaps the Financial Secretary will not be surprised to learn that we also have severe difficulties with clauses 126 to 130, which cover the aggregates levy. It is likely to have a disproportionate effect on Scotland's economy. In Scotland, many small quarries will experience dramatic increases in costs through the levy. It is a flat rate levy; that means that the increase will be proportionately greater in Scotland where aggregates are cheaper than in England.

However, the greatest impact of the aggregates levy will be on local authorities and projects such as coastal improvements. In my constituency, Angus council is dualling the notorious A92 road. The levy will add £2 million to the cost of the work. The council tax payer will ultimately bear that cost. That will happen throughout Scotland and Wales because 40 per cent. of all aggregates are used by the public sector.

The aggregates levy will have an impact much further down the line on those who manufacture added-value aggregates products such as pre-cast concrete. I recently visited Montrose Concrete Products, a manufacturer in my constituency. I was told that its products were already undercut by those from Northern Ireland. It appears bizarre, but I am told that the majority of some pre-cast products that are used in construction in Aberdeen come from Northern Ireland.

The Bill provides for transitional relief for Northern Ireland but not for Scotland. That is patently unfair. I do not begrudge Northern Ireland its relief, but Scotland and Wales should receive similar consideration. I appeal to the Government to reconsider the matter. Again, we tabled an amendment in the Budget debate. We received some support from the Ulster parties and some from Liberal Democrats, but not from the main Opposition.

The Chancellor painted a rosy picture of Britain under new Labour, as did the Chief Secretary when he opened the debate.

Photo of Michael Weir Michael Weir Scottish National Party, Angus

No, I shall take no more interventions.

There are wide variations in growth. In the United Kingdom, Scotland is held in a state of managed decline. Although United Kingdom growth has been 2.5 per cent. over the past 10 years, Scottish GDP has grown by 2.1 per cent. resulting in an opportunity cost of £3 billion. Growth in the UK may be set at 2.2 per cent. now, but as the Secretary of State for Scotland recently admitted, growth in Scotland is only 1.2 per cent.

The Bill shows yet again that the priority for Scotland is winning fiscal independence for the Scottish Parliament. Scotland is a wealthy country that can and should stand on its own fiscal feet, legislating to combat its unique challenges and to take advantage of its unique opportunities.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West 8:08 pm, 30th April 2002

I emphasise at the outset that I have never met Mr. Bercow outside the House, despite his remarks. He described the Chief Secretary as Vesuvius, but it was the hon. Gentleman who brought a volcanic metaphor to mind. He resembled a miniature Stromboli, huffing and puffing and showering the Chamber with rhetorical sparks, but ultimately destructive and negative, leaving a lingering whiff of bad eggs. At least he did not speak for as long as Mr. Davey, who rumbled on and on without threatening to erupt into life. I should congratulate Mr. Weir, who spoke on behalf of Plaid Cymru as well as the Scottish National party.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

At least his speech was short.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

It was, at least, short, as my hon. Friend says. I congratulate the hon. Member for Angus on the detailed knowledge of Welsh affairs that he extemporised during his speech. At least we were spared a speech from the moody mullah of misery, Adam Price, who normally speaks for Plaid Cymru on Treasury matters.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

Unfortunately, I was not able to intervene on the hon. Member for Angus. Does my hon. Friend agree that now would be a good opportunity for the Scottish National party to volunteer to serve on the Standing Committee for the Finance Bill, as it has missed previous opportunities to do so and bitterly regretted that afterwards?

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

As always, my hon. Friend finds an ingenious way to make his point, and he has done so very well in that intervention.

The Bill provides us with the legislative means by which most of the changes announced in the Budget can be put into effect. I disagree with the hon. Member for Kingston and Surbiton who—if I heard him correctly—said that the Bill was about more than national insurance. It is not about national insurance at all; those provisions are not in it.

There is no doubt in my mind that this Budget is the best in recent history because this represents the moment at which the Government took the steps required literally to insure the health of the nation. It is possible to introduce the measures in the Bill—and the associated changes in the Budget, including the changes to national insurance contributions—because of the favourable macro-economic position over which the Government have presided. There was a time, not long ago, when any economic textbook would have said that it was impossible simultaneously to have low inflation—a record low, as my hon. Friend Mr. David pointed out earlier—low unemployment and high growth, relatively speaking, all at the same time. I remind Opposition Members that our economic growth is very strong at a difficult period for the G7 countries, yet unemployment is at its lowest for more than a generation.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

I will give way to the hon. Gentleman, as he was kind enough to give way to me earlier.

Photo of Michael Weir Michael Weir Scottish National Party, Angus

Would the hon. Gentleman like to comment on the differential growth between areas of the UK? As I pointed out, the growth in Scotland is less than half that of the UK as a whole.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

The growth in different parts of the country is a matter of concern, and we need to ensure that we have regional policies to deal with that. I have no doubt, however, that the Government's overall macro- economic strategy is correct, or that the nationalists' policies would bankrupt Scotland and Wales. Indeed, the policies of Plaid Cymru, of which the hon. Gentleman has a detailed knowledge, are all to do with public subsidy and devaluation, and provide no answers as to how they would be paid for by the taxpayers of Wales.

As I was saying, unemployment is at its lowest for more than a generation—in Wales, as well as in the rest of the United Kingdom. In some parts of the country, the only unemployment that is left is frictional unemployment. There is hard-core, long-term unemployment in some parts of the country—let us be honest about that—and I am glad that the Chancellor referred to it in his statement, and that the Government are introducing measures, such as the step-up programme that is being piloted in my constituency, to deal with some of the hard-core, micro-level, supply-side problems of unemployment.

Photo of Michael Connarty Michael Connarty Labour, Falkirk East

My hon. Friend mentioned regional unemployment. Is he aware that in most Scottish constituencies, as in England, we have the lowest level of long-term unemployment and youth unemployment, and the highest level of employment, of the last 20 years?

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

I was aware of that, and I can confirm that that is also true of Wales. To listen to Opposition Members sometimes, anyone would think that we were presiding over an economic wasteland. That is a false impression; they do not make their case well when they exaggerate those issues.

We should remember that all this has been achieved by growth in labour market participation. Inflation, too, has been pegged back and subdued, threatened only, perhaps, by the possibility of cost-push inflation from overseas, which could result from the instabilities in the middle east. Nevertheless, we have a remarkable record. Growth, as I mentioned earlier, is strong compared with that of the other G7 countries. Last year, the UK topped the league, and we have every reason to suppose that that will continue in the next year as the world economic position recovers.

It is against the background of a strong economy that we can debate the Finance Bill, which will help to build the strong public services that we need in the years to come, and help to rebuild the national health service. As my hon. Friend Mr. Skinner has often said—and might say again if he were here now—"You can't do nowt without brass." The Government's record on that is very effective. Against this backcloth, the Government have rightly understood the key factors that will ensure that this sound long-term economic base is sustained.

In the first instance, the Government understand that enterprise—the creation of wealth, and the continuing quest for growth in productivity—is the foundation stone of prosperity. Secondly, they understand the need for strong public services, first-class education, help for those who cannot help themselves, and a modern, efficient national health service that preserves the principle of health care free at the point of use according to need—a principle that the Conservative party will not pledge to preserve.

The difference between this Government and their Conservative predecessor is the clear understanding that those two goals are complementary rather than in conflict with each other, as my hon. Friend the Member for Caerphilly pointed out so eloquently in his speech. Prosperity and social justice go hand in hand. You can't do nowt without brass, but you can't earn the brass without a well-educated, healthy work force. The Tory way was to squeeze public services in the belief that every penny taken out of the public sector would be better used in the private sector. They got the balance completely wrong, however, and our schools crumbled, our health service declined, our people failed to reach their potential and our economy became unstable during that period of boom and bust. The Bill, and the associated measures allied to it, are part of the continuing process of redressing that balance, to allow public services to be rebuilt.

Current United Kingdom public spending stands at 39.5 per cent. of gross domestic product, compared with 43.2 per cent. in Germany and 49.3 per cent. in France. Even when the measures outlined in the Bill and the Budget take effect, UK public spending will still be more than 3 per cent. lower than the European Union average. It is, therefore, false to portray these measures as profligate or as ones that will endanger UK economic growth.

I shall turn to some specific measures in the Bill. The Chancellor will have thought long and hard about the best way to raise the revenue that we need to invest in the NHS, and to find the £40 billion increase needed by 2007–08—the 43 per cent. uplift in real terms that is to come for our health service. He could have raised it by increasing income tax. Indeed, some revenue will be raised from that source through the freezing of thresholds. But there is little scope for that at a time of low inflation, and there are problems with that approach when inflation is higher, because revenues are raised. Raising income tax rates would also have affected many pensioners.

The Chancellor could also have raised VAT. In fact, clause 23 simplifies VAT for small businesses. Raising VAT was a favourite approach of the Conservatives when they were in office. When they first came to power, they almost doubled it from 8 per cent. to 15 per cent. I do not remember that being in their manifesto. They then used it to pay for the total debacle that was the poll tax, by raising it from 15 per cent. to 17.5 per cent. They brought in the council tax at that point. They then famously tried to put up VAT on fuel.

But the Chancellor did not put up VAT because he knew what the Tories knew, which was that, although it is an ad valorem tax, it is a regressive tax that impacts most on those on low incomes, such as pensioners. It is paid even by children when they spend their pocket money, which is in stark contrast to the thinking behind the child tax credit introduced by the Government. In short, VAT was an ideal tax for the Tories to increase, but not for us.

The Chancellor could have increased excise duties in many different ways, but those, too, are regressive taxes that impact most on the less well-off. Despite Lord Liverpool's 19th century warning not to interfere with the people's pleasures, that was a favourite option for modern Tory Chancellors. It is true that the Bill puts up the tax on cigarettes, but it does so in a way that is predicted to be revenue neutral, suggesting that there will be a fall in demand in equal proportion to the price rise. That will promote better health, as the Budget should, and as it is intended to do in the long term by targeting smoking, while raising revenue.

Yes, the tax on alcopops has been raised to remove the anomaly of treating them like wine, but the tax on beer produced by small breweries has been cut, and excise duties on spirits have been frozen for the fifth year in a row. Moreover, the tax on bingo has been abolished.

This Budget, however, is about more than beer, bingo and Bacardi Breezers. The decision to fund the necessary investment with national insurance contributions was surely appropriate. As the House knows, because the hon. Member for Buckingham tried in a rather silly way to make a debating point about it—I am sorry that he is still not present—national insurance does not feature in the Bill, because national insurance contributions are paid into the national insurance fund rather than the consolidated fund. National insurance changes do, however, exercise a powerful gravitational influence on the Bill, and it is therefore appropriate to say something about them now.

Funding the investment with national insurance rather than tax contributions is right, because it emphasises that the NHS provides the best possible insurance scheme. Furthermore, as my hon. Friend the Member for Caerphilly said, it is right for both worker and employer to pay. Good health care is as fundamental to the business as it is to the individual, but the market alone will not allocate health care in the interests of the economy and the nation as a whole—as the Conservatives will doubtless discover when they are announce their proposals in due course.

These measures have been built on the economic prosperity created by the Government. They encourage enterprise, and contribute to public services the investment that the nation needs. In marrying economic prosperity with social justice, the Government are pursuing the agenda that we all need. Their priorities are the NHS, education and jobs—the things that will make the nation healthy, wealthy and wise.

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons) 8:21 pm, 30th April 2002

The Bill clearly has many aspects. Kevin Brennan seemed to think that he could talk about national insurance while others could not. We should bear in mind the fact that the vast bulk of NHS funds still come from general taxation; it is the additional funding that the Government propose to take from national insurance. Besides, as was pointed out by my hon. Friend Mr. Davey, our alternative Budget would not have required the national insurance changes.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Will the hon. Gentleman cast his mind back to 1948, when we embarked on the creation of the NHS? Admittedly, he may well not have been born then.

The national insurance system, surely, was intended to cover unemployment benefit, the basic state pension and the health service. Is that not provided for in the National Assistance Act 1948, and is it not entirely appropriate for a Chancellor who wishes to increase NHS funds to do so through national insurance?

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons)

The hon. Gentleman should wonder why, having included such proposals in the Budget, the Chancellor suddenly discovered that he did not understand the procedures of the House and the workings of national insurance, and therefore had to make emergency changes to the business of the House to make his plans feasible. That is typical of the tortuous circles that the Government are having to negotiate—the hoops through which they are having to jump—to avoid the fact that they made certain promises with which they hoped to buy the last general election. They tried to keep the back door open in order to do what we told them they would have to do—find extra money for the health service. If they had not tried to close the front door, we would not be having these rather farcical discussions about their having to use national insurance.

Others wish to speak, and although we could go on for ever I think the aim is to finish at a sensible hour. I apologise to the Government for the fact that, in the interests of time, I may concentrate more on concerns my constituents will have than on all the good news in the Budget and the Bill.

My hon. Friend Mr. Jack spoke of efforts to bring about a simpler tax system and a more effective way of dealing with big policy changes that Governments want to make. They said that fundamental shifts in taxation should be separate from day-to-day tidying up of tax legislation. Any progress in that regard would be welcome. In the last Parliament we tended to sit until much later and we often had debates in the early hours. Mr. Clarke and others used to make rather good speeches at that time of night about the need to simplify and improve the tax system.

I enjoy Finance Bill debates in which we move away from the political aspects and where there is some good cross-party recognition of ways in which we could improve tax and finance arrangements to the general benefit of the country and the political system. We still have not got there, and I urge all with greater minds than mine who have applied themselves to the task to keep up the good work. That would be much appreciated by those who must currently fill in some of the most complex tax returns, and interpret some of the most complex signals sent by the Budget.

Others have touched on issues that will affect my constituency. A measure of the complexity of all this is the fact that, in the Bill, we are still trying to sort out the aggregate tax that the Government claimed to have sorted out last year. It would be nice if they admitted that they could perhaps restrain themselves, step back and look again at the impact of that tax.

The assessment of the environmental impact focused very much on the local impact of quarrying, in terms of environmental costs attributed to it. However, tax is being collected to the centre and being distributed throughout the country. Those from whom the tax is collected do not necessarily see the benefit of undoing any potential environmental damage.

This Budget poses an additional problem. Because of difficulties involved in the introduction of the tax, it will now affect large boulders from quarries. That will hit coastal defences. Given increasing flood threats and the growing need for such defences, it seems perverse to impose a major tax on the cost of building them. Even if the Treasury cannot look at the global nature of the tax, perhaps it could look at the margins. It has made other exemptions. Mr. Salmond mentioned the extra costs affecting the breakwater at Peterhead. The rock used will be transported only three miles from the quarry. Adding to the cost of the breakwater strikes me as an unfortunate side-effect of the tax.

As has been said, fuel duty is being kept down this year. That is bound to be welcomed in the north of Scotland—indeed, in the whole of Scotland. As it is so far from any markets, any move to reduce costs and avoid extra burdens is welcome. I hope the Treasury will resist pressure from Dr. Palmer to extend fuel duty to parts of the economy such as agriculture, fishing and, indeed, heating.

I am pleased about the proposal to charge foreign hauliers for road use, and to level the playing field between them and our hauliers. Some find it frustrating that it may not be implemented for several years. It is indeed frustrating that the announcement has been made so often, but implementation is still only on the horizon.

Haulage is important to my constituents and to the north and north-east of Scotland because, as I have said, we are further from the markets. Another important industry in my constituency is agriculture. A wider debate on finance and the general state of the economy still concerns the high pound versus the euro. Nothing in the Bill explains how the Government will square the circle, and help to remove some of the pressure.

There is still the possibility of access to agrimonetary compensation. If the Treasury could allow the Department for Environment, Food and Rural Affairs access to the money this year, it would redress some of the hangovers of the foot and mouth outbreak. I suppose it would help if DEFRA asked the Treasury, but I hope the Treasury will tell it that it can use the money this year, although it may not be able to in future. The Government should try anything that is available to them to repair the damage of last year's major foot and mouth outbreak.

One of the frustrations for the farming sector is that we are in the European Union, with free trade in agricultural products and a common system of agricultural support, yet the Government deny UK farmers access to the support that is available to competition abroad. UK taxpayers are in effect paying for foreign farmers to take jobs away from agriculture in this country. It would be a great gesture if the agrimonetary compensation were accessed in the last year in which it could be accessed.

We have already touched on national insurance versus tax. It goes back to one of the sad things about the way in which the Government approached the last general election. There is common cause between Liberal Democrat and Labour Members about the need to invest in the health service. Some of us are disappointed that the Government are looking to launch the first year of major investment in the health service when we had hoped to be in the fifth year of it, but at least there is common agreement about that investment.

The Government are in danger, however, of undermining the message that we tried to get across to the public at the election—that investment must be paid for through fair taxation. By not making that point at the election and by trying to use back-door methods to find the funding, the Government could undermine the credibility of the core message that we need to get across. The Government have a last chance to ensure that there is effective delivery of health care. For the sake of future generations, they have a major responsibility not to destroy the fundamental belief in an NHS free to users and paid for out of public funds. This is the last chance to get it right. Having made a mess of how to raise the money, I hope that they do not make a mess of how to spend it.

As the Paymaster General knows, I have major concerns about the Government's proposals for North sea taxation. In many ways, they were most effectively put by Mr. Blizzard. I hope that the Treasury will look at his speech extremely carefully and I hope that the tenor of his arguments have convinced those on the Treasury Bench that he is expressing a genuine concern; it is not a matter of political point scoring. Many in the industry had thought that there was much greater understanding in the Treasury of the complexities of the financial arrangements that apply in the North sea than appears from its presentation of the Budget.

I welcome the promise of the Chief Secretary to put in the Library detailed workings of the Government's assumptions and calculations. I hope that those detailed workings will go some way to explaining the figures that the Paymaster General gave in her reply to the Budget debate last Monday.

Photo of Malcolm Bruce Malcolm Bruce Liberal Democrat, Gordon

My hon. Friend will know that, as his neighbour, I share his concerns about the implications of the proposed tax changes. He will know that, on the day before the Budget, members of the all-party group on the UK offshore oil and gas industry met the United Kingdom Offshore Operators Association, which clearly had not the slightest indication that the Government had such proposals in mind. Those of us who have contacted members of that organisation since then know how shocked they are that the Government, having apparently developed a constructive relationship over five years, blew it out of the window without any notice. That has inflicted incalculable damage on confidence and investment in the North sea, and may be extremely damaging to the British economy.

Photo of Robert Smith Robert Smith Opposition Deputy Chief Whip (Commons)

I welcome that intervention. My hon. Friend has long experience of the importance of the industry. He has seen at first hand its impact on the north-east economy for longer than I have, and understands the industry's early stages of development, its progression, the way it integrates into the economy and the way it is affected. He is right about the all-party group. A sad message has gone out to people that they should ask for more than they want rather than enter into a genuine dialogue and reach a common understanding.

Those in the industry are genuinely shocked. Some people have put a lot of time and effort into trying to make the taskforce and Pilot work and to develop something from which we would all benefit. That is the important thing—the aim was to gain something from which we would all benefit. Obviously, the industry has its own interests, shareholders and finances to worry about. If the industry's financial interests differed from those of my constituents and the economy, I would have to part company from it but there was a commonality of purpose. The Treasury stood to benefit in the long run because, if we get more oil and gas out, we get more revenue. Jobs would benefit from long-term investment, and security of supply would benefit from the fact that we were taking our gas out of the North sea, rather than importing it. All those things seem self-evident.

On various platforms and in various debates, including in Grand Committee, I have often praised the Government for the way in which they handled Pilot. I praised Ministers in the Department of Trade and Industry for the way in which they took that initiative forward. Sadly, the Government have now done a lot of damage. We looked at other sectors, including fishing, and we said that Pilot was a model for the way forward for business and growth, a way of achieving financial understanding and dialogue between those affected by Government decisions and Government. That relationship has been broken, which is extremely damaging, and I hope that the Government will try to repair it.

I hope that it is possible to place the relevant information and figures in the Library before the Committee stage. If the Finance Bill receives its Second Reading and the motion goes through as on the Order Paper, the clauses will be debated next week. It would help if the Government were to provide the background and analysis to inform that debate. I suppose that to expect a change of heart by next week would be to expect a miracle. However, if, in the light of the debate, the Treasury concludes that it has got some of its assumptions and analysis wrong, it would be helpful if the Paymaster General offered the hope that the proposals might be revisited on Report, so that the damage can be undone.

Having listened to the Treasury make its case, I think that it has misunderstood where the North sea is at in terms of drilling, exploration and production. Current oil fields are tiny, and the cost of finding and developing them must therefore be met out of a much smaller return. Even though a huge field off Angola, say, would involve the payment of a higher tax return, it would still make much more money than a field in the North sea, on which less tax is paid.

The Treasury has lost the ability to strike a balance and ensure that the North sea's investment potential is maximised. It has not recognised the differential in costs and returns, and that we are dealing with much smaller fields. It has not dealt with the long life cycle of oil investment, and it has failed to recognise that profits aid investment in the next stage of exploration. Nor has it acknowledged that companies have to consider the long-term cycle of low and high oil prices, and the total return over the life of the risk. It has not considered the fact that every hole that a company drills that fails to yield oil has to be paid for through the successful fields.

One of the most fundamental and depressing facts for my constituents—many of whom have recently lost their jobs to make the industry competitive, and many more of whom may do so—is that the tax hits investment in the United Kingdom alone. If a company chooses to invest abroad, the Government do not impose that tax burden. Other Members have pleaded with the Government to consider measures such as interest costs and royalty relief. That would be a welcome development, but when the Government place the figures in the Library, they should recognise that, as we have shown, they have got them wrong. Doing so would offer some hope to my constituents, and for the long-term future of this country's prospects. The Government should be good enough to tell the House that the figures and the assumptions are wrong, and that they will happily revisit the tax regime on Report and do more to invest in this country's future.

The oil and gas so far extracted from the North sea are equivalent to the remaining reserves; in other words, we are perhaps only half way through its development cycle. However, if the Government kill off the investment and the larger platforms that provide the hubs for small fields, such fields will never be developed. Our future generations will not get the tax revenues from those fields, they will not get the jobs and we will lose the export industry that we have built through expertise. I urge the Government to think again about this extremely damaging and ill-thought out manoeuvre. Such a manoeuvre may be politically easy to achieve, but sometimes in government—and especially in the Treasury—it is a matter of more than easy political hits. Careful, structured decisions need to be taken that do not do long-term damage but long-term good. The rewards are for future generations, but the decision as to whether those generations will get them is in the Treasury's hands.

Photo of Jon Cruddas Jon Cruddas Labour, Dagenham 8:38 pm, 30th April 2002

Like my hon. Friend Rob Marris, I want to concentrate on the debate on productivity, which the Chancellor developed in his pre-Budget report and in the Budget itself.

Historically, our economy's productivity performance has been weak. In the post-war period, there was a trend shortfall between the UK and many of our competitor industrial economies. I am pleased that the Government have acknowledged that productivity improvements are the key to long-term growth and sustained increases in living standards, and I wish briefly to consider some of the elements that account for this deficit with our competitors. For example, why are our productivity rates so weak that, despite comparatively low labour costs, relative unit labour costs are uncompetitive? Before considering such issues, I wish briefly to consider the Government's general economic strategy since 1997.

There are four core pillars of Government strategy, the first of which is economic stability. Long-term interest rates are at their lowest for 35 years. Inflation is at its lowest for 30 years, and is expected to remain close to our 2.5 per cent. target. We have the lowest mortgage rates since the early 1960s, and debt estimates stand at a healthy 31 per cent. through to 2004. That is partly because Labour's first term witnessed a fiscal transfer to the Exchequer through the effects of growth, and because tax receipts were hoarded as we retained inherited expenditure plans. At the same time, last year Britain was the fastest growing economy in the G7. This year, growth is forecast at a range between 2 per cent. and 2.5 per cent.

The second pillar is reinvestment in public services. Owing to the mixture of caution and growth, we are now in the middle of a spending cycle characterised by sustained investment in public services. Through this spending cycle, spending on health will rise in real terms by an average of more than 6 per cent. a year; on education, by 5.6 per cent; on transport, by 14 per cent; and on police in England and Wales, by 3.9 per cent. In that period, expenditure on health will rise in cash terms by some £17.2 billion; on education, by £12.2 billion; on transport, by £5.1 billion; and on the police, by £1.6 billion. In total, that is £36.1 billion extra annual cash expenditure on the public services by 2003–04. Moreover, the Budget also announced a further £33.5 billion investment in health between 2003–04 and 2007–8.

The third pillar is attacking poverty here and abroad. That will mean £5 billion of extra help for pensioners, especially poorer pensioners through the minimum income guarantee. As we saw in the Budget, the new pension credit builds on that by rewarding thrift. We have introduced the national minimum wage and more help for families through record rises in child benefit and a new tax credit regime. The new working tax credit and the child tax credit will develop that strategy further. Internationally, we have increased Britain's aid budget by some 45 per cent.

The fourth pillar is full employment. Countless economists have had to alter their assumptions about the trade-off between unemployment and inflation—the so-called non-accelerating inflation rate of unemployment. We have seen more than 1 million extra jobs and the new deal has confronted long-term unemployment among young people. Unemployment is at its lowest since 1975 and full employment is once again a core aspect of public policy.

In terms of general economic management and growth, public service reinvestment, confronting poverty and tackling unemployment, the Government have established a robust platform. It is against that general background that the issue of productivity should be considered. I welcome initiatives announced in the Budget such as changes in corporation tax, including the reduction in the starting rate and the small firms rate cut; the new research and development tax credit; stamp duty exemptions to promote enterprise and investment in disadvantaged areas; and direct cash help to small firms that file tax returns on line. All are welcome stimulants to improve productivity, given the link between it and entrepreneurship.

I wish to focus on another element of our weak comparative productivity—the human capital side of the equation. According to OECD comparative statistics, Britain had become a centre for relatively cheap labour as early as the 1960s. For total hourly labour costs, which are the sum of total hourly earnings and social charges, we are well down the international league tables. After the second world war, Britain remained a relatively high-wage economy, but by 1970, of our leading competitors, only Japan had lower labour costs. Since then the gap has narrowed between Britain and the US, but not with France, Japan and Germany.

The cost of labour is one part of the equation: the other is the efficiency of its utilisation, or labour productivity as gross domestic product per man hour. The evidence reveals a substantial and enduring shortfall in productivity levels in Britain compared with the US, Japan and other leading western market economies. The differential with the US opened up earlier in the century. The gap with workers in Europe developed during the 1950s and 1960s, following post-war reconstruction. By the 1970s, the pattern had become entrenched.

A decade of poor, often negative, annual rates of productivity growth through the 1970s was followed by more rapid advances during the 1980s. That is often taken as evidence by the Conservative party that the supply-side reforms of the 1980s amounted to some form of economic transformation. The cornerstone of the strategy was the attack on individual and collective rights of people at work and, more specifically, an assault on the institutions held responsible for delivering those rights—the trade union movement. Alongside that, we saw the removal of sector-based training provision and the institutions that sought to put a floor under wages—the wages councils. Compared with the 1970s there was an improvement, but the argument that that produced an economic turnround in our fortunes is unconvincing.

The actual improvements in our productivity record averaged some 2.3 per cent. between 1979 and 1988, which was broadly in line with our leading competitors. The result is that in terms of our general economic performance we remain disadvantaged.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Does my hon. Friend agree that the statistical productivity gains in the 1980s were bought at the expense of 3 million unemployed? While productivity per person hour may have increased, for the economy as a whole—taking into account the 3 million, if not 4 million, unemployed—productivity did not really increase between 1979 and 1988.

Photo of Jon Cruddas Jon Cruddas Labour, Dagenham

I concede that productivity increased, but only because shedding 2 million in hoarded jobs and creating an army of nearly 3 million unemployed people will show up as productivity gains when one divides aggregate output by man hours, across the whole economy. However, the 1980s entrenched certain long-term patterns of low wages and low skills in the country's industrial organisation. Instead of turning our economic fortunes around, the 1980s tended to compound rather than resolve our long-term structural problems.

The result is that, in terms of general economic performance, we remain disadvantaged. Unit labour costs—total labour costs divided by the productivity of labour—remain relatively high, despite the low cost of labour in this country. In short, since the post-war period we have witnessed a general and sustained era of low comparative productivity, based on a history of low wages and weak systems of skill formation.

Some commentators in the 1990s argued that we were embarking on the so-called new economy—a new period of productive prosperity, driven by expanding production of knowledge and new technology and the erosion of traditional work in manufacturing and industry. Indeed, paragraph 20 of the Treasury Committee report refers to the new economy, and my hon. Friend Mr. McFall spoke earlier about the respective productivity gains to be engineered through the so-called new economy revolution. If those gains are real, we should expect improvements in the structure of the labour market and in our productivity record. However, none seems to be being registered in the statistics.

The UK has a record of continuous employment growth since 1992. That provides a good test for the argument that paid employment is moving decisively away from low-value production and service activities to new knowledge-intensive sectors, and leading to a schism with our low-wage, low-productivity past.

The labour force survey data collected by Professor Peter Nolan, the director of the Economic and Social Research Council's "Future of Work" programme, permits an analysis of whether a more productive industrial research structure is developing. As I did on Third Reading of the Tax Credits Bill, I shall refer briefly to some of Professor Nolan's findings, as they are germane to both debates.

The ESRC data show that, between 1992 and 1999, the category "White Collar Professionals" accounted for 1.5 million of the 2.3 million increase in employment. Yet the "Traditional Services" category—covering clerical and secretarial, personal and protective, sales, postal and cleaning jobs—and the category "Manual, Manufacturing and Construction Workers" still account for nearly two out of three jobs in the British economy.

When we inspect this analysis closely, we find that the fastest-growing occupations have been four long- established services—sales assistants, data input clerks, storekeepers and receptionists. The second-fastest growing group comprised people in the state-dominated education and health service sectors, and the third fastest group was the caring occupations—care assistants, welfare and community workers, and nursery nurses. In the 1990s, the fastest-growing occupation was hairdressing.

Those occupations could scarcely be said to be at the cutting edge of the new economy. The fastest-growing manual occupation since 1992 is housekeeping, which has grown by 368 per cent.

In short, key areas of growth through the 1990s, in terms of the demand for labour, have been in traditional low-paid, unskilled and routine employment, much of it carried out by women. At the same time, there has been no overall improvement in our comparative productivity shortfall.

We might conclude that a key long-term structural problem of the British economy is our weak productivity record, and an over-reliance on relatively low-skill, low value-added products and services. That pattern appears to have been consolidated through the deregulatory 1980s, and it is reflected in the contemporary structure of the labour market and a large part of its growth sectors. The Government's strategy of putting issues to do with productivity at the centre of our future economic strategy is therefore absolutely correct.

Boosting education and skills provision is critical in overcoming those entrenched structural problems. The key measures in the Budget in this area must therefore be welcomed—the pilot schemes allowing time off for training, and the £30 million set aside for the Investors in People scheme.

The skills agenda is key to boosting the productive capacity of the economy. It will work alongside the other recent reforms to the vocational system, which include innovations such as the learning and skills councils, the sector skills councils and modern apprenticeships.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

On the other side of the coin, does the hon. Gentleman believe that growing job subsidies and the resulting payment of a wage that bears no relation to the skills and the market value for the job are an important disincentive to upping skills and productivity improvement?

Photo of Jon Cruddas Jon Cruddas Labour, Dagenham

Does the hon. Gentleman mean through the tax credit regime?

Photo of Jon Cruddas Jon Cruddas Labour, Dagenham

I would say that that is a correct and focused strategy to reactivate the supply of labour which has been proving effective in terms of the pattern of unemployment reduction and job generation over the past four or five years, of which the tax credit regime is a part. I agree that there could be disincentives to increased productivity where job subsidies disincentivise capital investment. That is orthodox economic theory. However, I emphasise the other pillar of the Government's economic strategy—namely, the move towards full employment and towards reactivating the stock of labour through an active labour market policy which carries with it the non- accelerated inflation rate of higher unemployment. There is a trade-off between inflation and unemployment. Such a policy would be deemed successful under its own terms of reference.

The search for greater economic regional balance and regeneration is central to sustaining productive growth. As Member of Parliament for Dagenham, I represent an area central to the industrial regeneration of east London and the broader Thames gateway. The emphasis on skills formation will be critical in our strategy of rebuilding the centre of manufacturing for London in Dagenham—the lowest wage economy in greater London, with low basic skills provision and staying-on rates.

The new centre for manufacturing excellence that is being built and the new Ford engine plant on the Dagenham estate will be key elements in this strategy. That is working hand in hand with the London development agency and the education and skills providers in the locality across the public and private sector. Already we are beginning to see results.

This sub-regional strategy complements the strategy developed in the Budget. The objective is to build a virtuous cycle of high-wage, high-skilled production alongside much-needed infrastructure development. That is beginning to happen in Dagenham, in collaboration with the devolved agencies and the Government. At the same time, the strategy is to retain macro-economic stability, rebuild our public services and confront poverty.

Overall, I welcome the fact that issues around productivity are moving centre stage in our economic debates. I congratulate the Government on the coherence of their strategy, and strongly support the Bill. 8.52 pm

Photo of Mark Hoban Mark Hoban Conservative, Fareham

I begin by building on the comments of Mr. Weir, who is not in his place. He raised a very important point for a large number of small business people—the treatment of unincorporated businesses and the impact that this Budget and preceding Budgets introduced by the Government have had on the balance between incorporation or remaining an unincorporated small business.

An article in Taxation magazine in March 2002 highlighted through the use of numbers the dilemma that many businesses face. I am not one for wading through huge volumes of numbers—I am rebelling against my previous occupation as a chartered accountant by not doing so—but I want to put on record the impact, prior to the Budget, of changes in the tax rates.

In the tax year 1996–97, comparing the tax on a net income of a taxpayer earning £42,000 as an unincorporated sole trader and the tax paid by an incorporated business, the benefits of being an incorporated business were relatively marginal, at about £1,300. By the financial year 2000–01, that benefit had increased to £3,500, showing that the unincorporated businesses were suffering as a consequence. Whereas in the last financial year, a trading income of £20,000 would yield a difference of about £2,000 in favour of an incorporated business, as a consequence of the Budget, with the extension of the starting rate for corporation tax of zero to £10,000, an incorporated business is some £3,300 better off than one that is unincorporated.

As a result, many small unincorporated businesses, such as plumbers, small builders or shopkeepers, think that they should incorporate because the tax position has become so advantageous for them. In doing so, however, they will of course incur additional costs, such as setting up the company, filing returns and the preparation of accounts which, although not audited, need to be filed with Companies House. That is a major concern. At a time when businesses are suffering from an increase in regulation, there seems to be a general drift towards incorporation in Government policy.

Previously, one of the barriers to incorporation for sole traders was the amount of pension contributions that they could make, because tax-free pension contributions were limited to salary. That pushed people to remain unincorporated: they paid themselves high salaries and received tax benefit on their pension contributions. However, with the introduction of stakeholder pensions by the Government, an incorporated sole trader need only pay himself a decent salary in one year and then for the remaining four years he can use that year-one salary as a reference point for his pension contributions. There is no longer a barrier to incorporation owing to differential treatment of pension contributions.

The Federation of Small Businesses asked whether that was a deliberate policy of the Government. The Inland Revenue assured the federation that the policy was deliberate and was intended to encourage enterprise. However, I am at a loss to understand how incorporation in itself is an encouragement to enterprise. I should have thought that we should be encouraging small businesses to be set up according to whichever format suited them rather than directing them—as the goal of Government policy—towards incorporation.

That affects not only sole traders, but partnerships. Today, I spoke to someone who runs his business as a partnership but is taking the route of incorporating it, as it is more tax-efficient to do so as a consequence of the tax changes made by the Government.

The situation will worsen in the financial year 2003–04. Personal allowances may be frozen, but the thresholds for corporation tax may rise in line with inflation and national insurance contributions will be higher. That will be an impetus to force more and more small businesses down the route of incorporation.

Small business men throughout the country would welcome an explanation from the Government as to why their conscious policy is to head down the route of forcing—or encouraging—small businesses to be incorporated. Perhaps the Paymaster General will take the opportunity of this debate to provide that explanation. It certainly has not yet reached small business men; they are angry about that drive to incorporation and feel that, as a consequence of this and previous Budgets, the Government are not interested in enterprise or indeed fairness as regards their businesses.

Several Opposition Members have drawn attention to the length of the Finance Bill; it is the third longest in history. The measure is complex. All the commentators on it are consistent in their remarks. On 25 April, Edward Troup of Simmonds and Simmonds said:

"Companies which in the past have not had to worry about any special rules are now getting rules that they do have to worry about."

On the same day, John Battersby, a tax partner at KPMG, said:

"We really need a slowdown in this torrent of legislation to provide businesses with the opportunity to assess where they are and concentrate on their business."

Certainly the message that I am receiving from businesses and accounting practices in my constituency is that the rate of change in the tax system is becoming unmanageable for many businesses. Business men spend more time dealing with regulation than running their businesses.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Does the hon. Gentleman believe that the tax system should try to keep up with the massive and rapid changes that are occurring in business to ensure that those decisions that businesses take are on the basis not of distortions in the tax system but on the basis of what is best for their business? Therefore, if business changes, the tax system—if it is to provide the best environment for business—must also change.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

The Paymaster General makes a valid point. There is a distinction, however, between those changes that are driven by the way in which businesses change—to which the tax system must therefore respond—and the changes that the Government have introduced over the last five years in the tax credits scheme. As I said in Committee earlier this year, a series of different tax credit schemes exist. Those are changes in the tax system that the Government have imposed, with which employers and their advisers need to keep up. Keeping up with legislation is therefore a problem. I accept the Paymaster General's comment that there is a need for tax legislation to reflect change in business, but the Government must also recognise their responsibility for change in the tax system.

Clive Lewis, the secretary of the Institute of Chartered Accountants enterprise group, has summarised the problem with the burden of red tape and tax administration:

"Not only does the volume and complexity of regulation eat into the resources of business but it absorbs time that could be spent more valuably on survival and expansion."

That point is reiterated time and again by businesses across my constituency and by business men whom I meet here and elsewhere. The Bill adds to that complexity, and not merely through its length.

In his opening remarks, the Chief Secretary referred to the community investment tax credit, which will cost the Exchequer £5 million in the next fiscal year. The Bill includes 27 pages of regulation to administer a scheme that the Government estimate will raise only £100 million in investment in deprived areas. I am not clear what behavioural impact this tax change will have. I expect that a lot of money that would have already gone into deprived areas will simply be rebadged under the scheme so that people benefit from the generous tax credits over the life of the scheme. I question whether we need 27 pages of regulation to administer what appears to be a relatively small and inexpensive relief on offer to businesses that would invest in deprived areas.

The other area that causes me concern in the Budget is the tax relief for community amateur social clubs and sports clubs. The Government have been relatively generous in allowing merely six pages of regulation to cover that. When I look at the detail of those pages, however, it concerns me that many treasurers, who are not accounting or tax experts, may find categorisation of expenditure and the way in which non-qualifying expenditure can be clawed back from relief in previous years to be not worth the candle and too complicated to try to find ways of recovering some of the tax benefits offered by the Government. If we are to offer community groups the opportunity for tax relief, we should try to make sure that the schemes that we offer them are relatively simple and straightforward. By offering complex schemes, the take-up rate, as is seen so often with changes introduced by the Government, will be surprisingly low.

In a debate in Westminster Hall earlier this year, I commented on the way in which reliefs and changes to the tax system give rise to the risk of tax avoidance. I want to conclude by quoting from the Treasury Committee's report on the Budget. It referred to the film tax relief, which will be abolished in the Bill—

Photo of Mark Hoban Mark Hoban Conservative, Fareham

I am sorry. It will be amended in the Bill. Interestingly, when the relief was initially suggested in 1997, the estimated cost was some £20 million over two years. Remarkably, the saving to the taxpayer from the restriction of the relief is £500 million over two years. That shows how reliefs can be manipulated.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

I am not here to make tax policy on behalf of those on the Opposition Front Bench. However, I generally take the view that the fewer reliefs there are, the lower the general tax rate is and the harder it is to avoid tax. I therefore conclude with a quote from the Treasury Committee report. Paragraph 73 says:

"We are concerned that the recent proliferation of tax reliefs, allowances, and credits will increase the scope for tax avoidance, and we urge the Treasury to consider carefully such issues before bringing forward additional tax reliefs of this kind."

A simpler tax system is in the interests not just of taxpayers, but of their advisers and the Exchequer generally.

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East 9:05 pm, 30th April 2002

Although my contribution comes late in the night, I am sure that you, Madam Deputy Speaker, will appreciate that it will be a quality contribution with more light than heat.

Mr. Field is no longer in his place, but I agree with his estimation of the stature of the current Chancellor of the Exchequer. The hon. Gentleman made the point that my right hon. Friend was one of the best Chancellors that we have had. The quality of the Budget that we are discussing provides clear evidence of that.

The outcome of this Budget process is to raise money to ensure that finance is available to meet the objectives of the Government's spending plans that have been set to satisfy the needs of the people. It is therefore right that the major point of these proposals is the need to provide funds to put Britain's public services, especially health, on a sound footing.

It is clearly evident from the public's reaction to the Budget and to the national insurance contribution increases to be introduced next year that the Bill faces up squarely to the top priorities of the British electorate. Last week's opinion polls clearly indicated widespread support for the proposals, with 74 per cent. of those sampled giving support for the increase in national graduated contributions that aims to brings this country's health expenditure up to the levels enjoyed in Europe and to satisfy consumer and customer expectations.

Public support for the Government's proposals to protect and enhance public services was clearly underlined by someone who is one of the Government's severest critics and one of the strongest supporters of public service provision. John Edmonds, who is not often kind to the Government, pointed out last week that we had witnessed:

"A rare event in British politics, an honest and courageous Budget, putting need before greed."

Within that catchy slogan lies the fundamental difference between those on the Government Benches and the Opposition.

This Government cater and care for the many; Opposition Members care only for those who can care for themselves. The Conservative party—which in the past created such a hue and cry about Labour's so-called stealth taxes—now cries wolf again at the people's health tax, a tax increase brought forward as part of a balanced and carefully constructed series of initiatives to maintain the UK's impressive economic performance and to safeguard continued growth in the economy and the UK's long-term prosperity.

Photo of Angus Robertson Angus Robertson Shadow SNP Spokesperson (Defence), Shadow SNP Spokesperson (Foreign and Commonwealth Office)

The hon. Gentleman mentioned the importance of growth to the economy. Will he perhaps tell the House the growth figures for the Scottish economy and whether he is happy with them? Can he name another of our close neighbours that has a growth figure lower than that in Scotland? Does he agree with his colleague, the Member of the Scottish Parliament for Dundee, East, John McAllion, who said recently:

"I do not think the financial system in the Scotland Act is working very well. We should take time to do this, certainly before the next Scottish elections"?

In order words, we should give Scotland financial independence.

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East

My colleague, the MSP for Dundee, East, is entitled to his views. We are an open and democratic party.

At the recent meeting we held with the members of the Scottish chambers of commerce, the Scottish growth rate, which is significantly lower than the growth rate for the United Kingdom, and manufacturing gave rise to concern. However, their representatives told us that consumer spending in Scotland was on the up, house prices were increasing and there was an improved uptake of tourism. Although the Scottish economy is perhaps not performing as well as the UK economy, they are clear indicators that there are significant grounds for optimism. Those aspects of the Budget which I welcomed last week will certainly increase the efforts of Scottish manufacturing and assist Scottish growth, but I am sure that we will return to that later.

At the end of the day, there has been a lot of criticism of the Budget proposals. Industry's response has been a cranking-up of the campaign in which it claims that despite tax benefits to improve productivity and encourage investment, the increases in national insurance will undermine confidence, destroy jobs and damage future growth prospects. I understand its concerns, but its Cassandra-like prophecies of doom are vaguely familiar. Were those arguments not used in opposition to the minimum wage? Were we not told by the Opposition that British business could not afford the minimum wage, which would destroy jobs, ruin the economy and stifle growth? However, in fact, growth has continued to increase and jobs have continued to be created.

It was heartening to read the speech that Mr. Mervyn King, the Deputy Governor of the Bank of England, delivered to the British chambers of commerce last week. He argued that the increase in national insurance would help to moderate consumer spending and house price inflation. If that step dampens down consumption and has a deflationary impact on housing prices, it may deal with the problem of the Nationwide figures in today's papers which show house prices at record highs, even in Scotland, so we may not have to face up to an early rise in interest rates, a point reinforced by The Daily Telegraph in a headline to a report of Mr. King's speech—"Tax Rises Good for Growth, Bank Argues".

While business has signalled its opposition to the Budget proposals in the round, and is clearly upset at having to pay its share for a better health service—a social cost—surely it must see their economic logic if they help to avoid dearer money and keep interest rates at the historically low levels achieved by successive interest rate cuts last year. In building his Budget, the Chancellor has taken steps to ensure that the macro-economic factors that determine consistent, balanced economic performance are in equilibrium. It may be a tax-and-spend Budget, but it is certainly not a boom-and-bust Budget; it is a just Budget and has been well received by the public.

I should like briefly to address two areas of the Budget relevant to my constituency which have been mentioned by other Members this evening: the new levy on North sea oil introduced by the Chancellor and the new research and development tax credit for larger companies. I commend my hon. Friend Mr. Blizzard on his contribution, in which he expressed concerns about the oil levy. I am a member of the all-party offshore oil and gas industry group and represent a coastal community which was mentioned by my hon. Friend and which missed out on the biggest boom in the oil industry as it is at the margins of the business, primarily innovation and supply.

The current oil price of $26 has been sustained over the past few years, as was said in a debate last week with the chief executive of BP. Given the current production costs of $8 a barrel, the levy is acceptable in the short term. However, to ensure the long-term viability of British operations, I join Members who have urged the Treasury to engage with industry to ensure a long-term productive future.

I warmly welcome the research and development tax credit for larger companies. The future of British and Scottish industry, as well as manufacturing jobs, can be secured only through investment. I speak as a Member representing a constituency whose economic history is littered with industries that have suffered and disappeared through lack of investment. I can also cite glowing examples of companies in my area that have to their credit invested heavily in research and development, as evidenced by their continued profitable existence.

NCR recently opened a large R and D facility in Dundee to help plan and promote the automated cash machines that will be used globally in years to come. The Michelin tyre company's investment in machinery and its work force has enabled it to survive and prosper in a hugely competitive market, producing high-quality products at a distance from their market. In both instances, high-quality, well-paid jobs have been sustained to fuel the local economy, which would be much poorer without such jobs.

I believe firmly that the Government's economic strategy has been correct over the past five years, although that has often been hidden by the stormy squalls of political debate in the Chamber and in the pages of a steamed-up press. The strategy was clear: first, get the economy right; secondly, ensure that the structures needed to build a fair society are in place; and lastly, be brave enough to raise taxes when required and spend the money on the programmes necessary to bring relief and succour, to provide jobs and credible incentives to work, and to sustain a flexible work force on which the long-term prosperity of the UK and Scotland depends.

In conclusion, as the Chancellor made clear in his Budget statement, we are perceived as being at a crossroads in the life of this country. It is now time to make fundamental long-term choices as to whether the national consensus that has existed for half a century in regard to our public services is to be renewed for the years ahead. It is clear that the national consensus supported by most of the parties in the Chamber, which was referred to by the Chancellor, is still as firm as ever in favour of public services and the national health service. However, there is no political consensus on the issue.

The issue of the national insurance increases highlights the bankruptcy of the major Opposition party, whose vision for public services—whether transport, education, housing or health—is a vision of services provided by the private sector, paid for by increased charges and private insurance. The Budget proposals and the Finance Bill put clear blue water between the Government and the Opposition, a situation that I welcome. There is a clear choice between my party—a Government who believe in public services and are willing to put money to good use to sustain and enhance them—and the Opposition, who are seeking to revive and renew the old Thatcherite agenda, which would dismantle them.

I will gladly go into the next general election confident that the banner of social justice, the people's flag, has once again been hoisted by the people's party, which will carry the day.

Photo of David Laws David Laws Shadow Spokesperson (Defence) 9:17 pm, 30th April 2002

I am pleased to be able to contribute to the debate. I shall follow on from the comments made by the Chairman of the Treasury Committee on the Committee's Budget 2000 report, which was released today. I commend Mr. McFall for his measured and sensible comments about the contents of the report, which contrasted with the unusually intemperate comments of Dr. Palmer, who I am pleased to see back in his place.

The hon. Member for Broxtowe gave a rather unfair description of the activities of the Treasury Committee yesterday when it drew up the report. He gave the impression that the Opposition members had been on the rampage yesterday in Committee Room 6, forcing into the report all sorts of bizarre and overtly political conclusions that were not warranted by the Committee's deliberations.

I hope that the hon. Gentleman has had a chance to reflect on those comments, especially as he is usually an extremely temperate and moderate member of the Committee, and I hope that when he reflects on the report, he will study carefully the conclusions set out at the back of the report. In particular, I hope that he will study conclusion (s) on the redistributive nature of the Budget, conclusion (j) on the trend rate of growth, and conclusion (h) on the stability and growth pact.

I hope that the hon. Gentleman will reflect on the fact that, in all those areas, amendments were tabled during the Committee hearings that altered the draft report in a way that was more sympathetic to the Government. I expected some praise from the hon. Gentleman for having proposed two of those amendments myself, including one which, surprisingly, won the support of Conservative members and is now being echoed from the Government Back Benches—that is, the amendment that appears in conclusion (s), which states:

"We welcome the fact that, within the context of a tax raising Budget, the budget measures are broadly redistributive from those on higher incomes to those on low incomes".

Not only did we get surprising support from Conservative Members, but we have now even managed to encourage Labour Members to use the word "redistributive".

How can it possibly be the case that the Opposition Members who serve on the Treasury Committee were making irresponsible additions to the report, given that they forced in such amendments—more Labour than the hon. Member for Broxtowe himself—and that they voted to include amendments such as that which now appears as conclusion (k)? That conclusion states:

"We share the Government's view that the Stability and Growth Pact should be reformed to take account of issues such as"— the precise issues that appear in the Budget documents are then listed. I hope that the hon. Gentleman will reflect carefully on those issues and perhaps now withdraw his earlier comments, and I give him the opportunity to do so.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

I am grateful to the hon. Gentleman for giving way. I am not totally impressed by the brace of fig leaves that he offers. Does he not feel on reflection that it is an undesirable precedent for a Select Committee to determine a report on something as central as the Budget not by consensus, but effectively by 25 whipped votes?

Photo of David Laws David Laws Shadow Spokesperson (Defence)

I am grateful to the hon. Gentleman for that comment. It is a great precedent that hon. Members who draft Select Committee reports should consider any case on its merits, not on the basis of whether the arguments embarrass the Government. Some hon. Members would like the Select Committees to be the Government's poodles, but many more hon. Members believe that Select Committees should be willing to be the terriers that pursue the Government and which occasionally nip at their heels when they make mistakes.

I have mentioned the parts of the Select Committee report that support the Government's policies. I hope that all Labour Members welcome that support, as it gives the lie to the idea that Opposition Members who serve on the Treasury Committee irresponsibly amended the report. The Select Committee supports some of the Government's policies, but it warns the Government about some issues, such as the change in the growth forecasts. Many outside commentators regard that change as not being particularly prudent, and certainly as having removed the prudence element that was previously in the Government's growth forecast, leaving only as a prudent cushion the surpluses that the Government are projecting on the current balance—something that the Select Committee welcomed in the Government's policy.

I shall deal further with the criticisms in the Treasury Committee report that were backed by Opposition Members, in spite of the reticence of some of the Labour Members who serve on the Committee. If the argument, used by the hon. Member for Broxtowe, that Opposition Members were being irresponsible was well founded, one would expect there to be a huge divergence between the evidence on those issues given to the Select Committee and the wording of the report, but there is no such divergence. That is shown exactly in respect of the Government's decision to increase employers' and employees' national insurance contributions—the first major item of criticism made by the Treasury Committee.

Andrew Dilnot of the Institute for Fiscal Studies gave evidence to the Select Committee on the Treasury. The Chairman asked Andrew Dilnot:

"Are the Budget proposals to increase the National Insurance contribution rates rather than income tax going to ensure that the burden is 'spread as widely and fairly as possible'?"

Andrew Dilnot, who is well respected, replied:

"I cannot see what coherent strategy for raising tax can be met by these National Insurance employee changes".

He described

"better-off pensioners and those living off unearned income" as

"not groups that I think it is easy to imagine reasons for excluding."

That justifies the Treasury Committee's criticism on that point.

Photo of David Laws David Laws Shadow Spokesperson (Defence)

I am sorry, but I will not give way because of the time. I regret not giving way because I am sure that the hon. Gentleman would make a pertinent point.

Whom can we turn to on the Government's proposal to increase employers' national insurance contributions, on which no assessment has been made of the employment consequences? Whom can we turn to in support of the Treasury Committee's concerns about the employment effect of that measure, which will increase the tax on jobs? The answer is none other than the Chancellor of the Exchequer himself, who seemed to have forgotten when he came before the Treasury Committee a few days ago that just two years ago when he introduced the climate change levy he cut employers' national insurance contributions and argued in a Treasury press release that the cut in that tax on employment would boost employment.

Apparently, the economic rules have now been overturned, and two years later the Chancellor can increase employers' national insurance contributions without that having any effect on employment. That is a miraculous change, just as miraculous as the fact that the Chancellor can effectively, without in his view abolishing the upper earnings limit on employees' national insurance contributions, extract money through employees' national insurance contributions from every person who now earns more than what used to be the upper earnings limit.

Two other fundamental criticisms of the Budget were made in the Treasury Committee's report. The first has been mentioned by a number of individuals, including Mr. Hoban in his helpful speech. He warned about measures such as the films tax relief, which was introduced with great fanfare in 1997 and altered in 2001. That was to be a limited cost measure—£15 million in the first year—directed towards great British films, which would be stimulated. Now we discover from the Chancellor that programmes such as "Coronation Street", "Ground Force" and "Emmerdale" are being made with that tax relief—that the money going into the Exchequer from hard-working families is being wasted on such reliefs.

The concern about the Government's tax policy that was expressed clearly in the Treasury Committee's report is not only that we are getting an increasingly complicated tax system but that those complications open up precisely those types of loopholes. No doubt we shall find that other measures, such as the reduced rate of beer duty for small breweries, will open up exactly such problems in the future. No doubt we shall find that the Chancellor of the Exchequer will return in a couple of Budgets' time to announce to much less fanfare that he is closing loopholes and recovering large amounts of money.

It is easy to welcome such measures when they are announced individually, but one would have hoped that the Treasury, of all Departments, would be conscious of the fact that there are no free lunches and that money that is given to the film industry and to "Coronation Street" potentially comes from other areas that could be higher priorities for the Government, such as the Government's agenda on social exclusion, lifting people out of poverty and raising tax thresholds. Surely those priorities should be higher up the agenda than the introduction of silly tax reliefs and gimmicks that merely end up being loopholes that are abused by accountants and others in the private sectors.