Schedule 37 — Aggregates levy amendments

Orders of the Day — Finance Bill — [2nd Allotted Day] – in the House of Commons at 4:10 pm on 4th July 2002.

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Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan 4:10 pm, 4th July 2002

I beg to move amendment No. 11, in page 478, line 29, at end insert—

'(3A) In subsection (3) at end insert—

"(g) it consists wholly of uncrushed aggregates to be used for harbour sea defence projects or coastal erosion protection.".'.

We were making such good progress too, but now we come to something slightly more controversial, and something significant to the economic life and environmental concerns of many coastal communities throughout the United Kingdom.

I have debated the issue several times with the Minister's predecessor in a number of different places, including Westminster Hall and a statutory instruments Committee. Given that that Minister was promoted to the Cabinet half way through these debates, it could only be that his promotion was based on his superb ability to deliver a very bad case in a really eloquent way. That is what delivered the right hon. Gentleman's promotion. I commend the present Minister, however, and perhaps he could deliver a much better case in an eloquent way. Who knows where he might end up if he were able to do that? A number of Members across the House would appreciate a reasonable concession on this important issue.

The amendment is specifically about exempting coastal protection defences from the imposition of the aggregates levy. We have had debates in other places at other stages of consideration on the aggregates levy as a whole, and I do not intend to repeat these arguments, except to say that there are aspects of the levy that should cause concern even for those who say that it was justified on environmental grounds.

For example, there is regional disparity in the impact of the levy. The levy is gathered on aggregates as produced. The Government announced that there was to be a fiscally neutral measure and proceeded to offer a small rebate on national insurance contributions. However, areas that have few people but many aggregates—for example, rural areas such as Scotland, Wales, much of Northern Ireland and much of the north of England—could end up paying a substantial proportion of the tax, whereas areas with large numbers of people will get a rebate in the form of national insurance contributions.

An example that I shall give concerns Peterhead Bay Authority. The impact of the aggregates tax on its proposed breakwater is an extra £1.2 million imposition. In return, it will receive a rebate of about £650 in national insurance contributions. I accept that that is an extreme example, but even when a tax is announced as neutral by the Treasury, it is as well for many people in many areas carefully to count their fingers to assess what the impact will be in practical terms.

I have a real concern. Unlike the oil tax, which, as we debated yesterday, was a surprise to many people, not least some Labour Members representing constituencies in the north-east of Scotland, the aggregates levy, to be fair to the Government, was announced several Finance Bills ago. It went through exhaustive consultation and debate with the industry. There is nothing wrong with a consultative process in terms of the levy, but basically the problem with the tax is that the Government, after that consultation, went for a sharp change in direction, which took in things such as coastal defences and the aggregates that are used for those defences. Originally the Government had intended them not to be taxed, but that was an unintended consequence very late on in the process of consultation.

The Government originally envisaged that aggregates used for coastal defences would be untaxed because by and large these are uncrushed, unprocessed and unmachined aggregates. The environmental impact of such aggregates is much less than the ones that have gone through an industrial process. The Government's intention in introducing the tax was to try to substitute reclaimed and recycled aggregates for machine-processed aggregates. In Peterhead Bay Authority's proposal, 99 per cent. of the aggregate to be used for a breakwater in my constituency is uncrushed, unprocessed aggregate from a quarry five miles away. There is no environmental saving whatsoever in taxing that aggregate, as large blocks of rock will be taken from one part of Buchan and moved five miles along the road to another.

There is no environmental gain from putting the finances of that breakwater in jeopardy, but there will be a substantial environmental and economic loss if it is not built. The bay authority, like many small harbour trusts and boards the length and breadth of the country, is responsible for sea defences, protection against the erosion of beaches and sea walls, and other aspects of coastal protection. If we are to believe Government forecasts, there is a genuine possibility that much of southern England may be under water, or at least under threat, within a hundred years or so. On balance, that is bad thing, although it is a close call.

Given those environmental problems, we can expect a greater call for coastal defences in the next generation. Many of the organisations with responsibility for defences are not multi-million-pound or billion-pound bodies—they are small trust ports or harbour authorities charged with the task of securing the defence of the coastline. In my constituency, Peterhead Bay Authority has been husbanding its resources for 10 years, and has saved up £10 million in revenue. It undertook an extensive consultation to produce the breakwater project, which will provide a calm harbour 365 days of the year—arguably the best deep-water port on the east coast of Scotland—and secure coastal defences. Late in the day, as an unintended consequence of the imposition of the aggregates levy, the authority was faced with an additional bill of £2 million, which has subsequently been reduced to about £1.2 million, but which still makes the economic viability of the project marginal.

To be fair to the Minister, whom I met this morning, and his predecessor, every Minister or Government spokesman to whom I have spoken is sympathetic to the project in my constituency, and I am sure that they would be sympathetic to ports and bay authorities contemplating similar harbour defences throughout the country. Everyone agrees that such projects are a good thing for the environment and the economy, so why are they being taxed under the aggregates levy? It has been argued that the objective of the levy is to secure more recycled aggregates. The technical specifications for the breakwater in my constituency make it impossible to use recycled aggregates. The authority has reduced the use of aggregates to the minimum needed to secure the calming of the harbour for which they have statutory responsibility.

It is invidious to tax a body that is trying to discharge its responsibilities for protecting the environment and providing an infrastructure to stimulate the economy in north-east Scotland. It would be wrong to make a similar imposition on other authorities which are trying to do comparable things. It is not as if there are not exemptions from the levy. In fact, there are a total of some 22 exemptions, including, for example, the sand for children's playground sandpits. Clay pigeons are exempt from the levy—good news for clay pigeon fanciers across the country.

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

I can hear roars of assent, and am sure that Labour Members lobbied hard, as I would have done, and now approve of the exemption of clay pigeons from that iniquitous tax.

Harbour walls, defences and breakwaters are as important as the pursuit of clay pigeon shooting which, naturally, we all support. I urge the Government to see whether they can find a way of not penalising such important work. Coastal communities are experiencing a range of pressures—those of us representing constituencies with fishing interests are only too well aware of pressures on the fishing industry. Projects undertaken by relatively small organisations to deal with the ever-increasing environmental threat from rising seas are expensive, so it is unfair to impose an additional burden on them, given that their work is for the public good. I urge the Minister, whose predecessor was sympathetic to the argument, but unable to deliver a solution without damaging the integrity of the tax, to use his ingenuity and fresh approach to see whether it is possible to avoid the huge imposition on harbour and bay authorities across the county that is an unintended consequence of the levy.

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

I support the amendment and the arguments of Mr. Salmond. In particular, I support his point that there are unintended consequences from not thinking through the aggregate tax, as environmental costs will be recycled back into the community. When the environmental impact of quarrying was assessed, much was found to be local to the community in which the quarry is situated. However, the tax takes money away from that community and spends it across the whole country, well away from the quarry. In Peterhead, the fact that the aggregates will have to be transported five miles suggests that any recycling, even if up to specification, would hardly reduce journey times or environmental impact.

The Government would do well to accept amendment No. 11, which would maintain the status quo on coastal defences and allow them to find another way to close a worrying loophole, which stems from a lack of thought about the impact of the aggregate tax and the way in which it would work. I urge the House to support the amendment, but it would be even better if the Government came up with a constructive proposal that would render it superfluous by making it possible to get coastal defences built without an unnecessary tax burden.

Photo of Alan Reid Alan Reid Opposition Whip (Commons)

I, too, support the amendment tabled by Mr. Salmond.

Climate change is leading to higher sea levels and increasingly violent storms, which means that coastal communities are under even greater pressure. Coastal communities on the Atlantic islands suffer from extremely violent storms and are under great threat from coastal erosion. The aggregates tax will simply put a greater burden on Argyll and Bute council and private individuals who want to build coastal defences to protect local villages and roads.

The tax is supposed to have an environmental purpose, but I do not envisage any environmental benefits from imposing a tax on aggregates used for coastal protection. On islands, for example, the aggregates would be quarried and moved, in some cases only a few hundred yards, for use in coastal protection. Alternatives simply do not exist. The Economic Secretary, in his letter to me of 11 June, said that "alternatives do exist." I should certainly like to hear exactly what they are. On small islands like Tiree and the slate islands of Easdale, Luing and Seil, villages are under threat, as the tax puts a greater burden on their efforts at protection.

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

I agree with the hon. Gentleman. The alternative would be to bring a recycled aggregate, which would be suitable for some projects, many hundreds of miles by land and then over sea, but that would hardly meet environmental standards.

Photo of Alan Reid Alan Reid Opposition Whip (Commons)

That is a valid point. An alternative may exist several hundred miles away, but in environmental and financial terms a long road and sea journey would be more expensive than paying the tax. The alternatives simply do not exist on the islands.

The purpose of the tax was supposed to be environmental, but I cannot see the environmental benefit in charging people more money to avoid having their house washed into the sea. There cannot be a much greater environmental disaster than that. I hope that the Government will listen today and accept amendment No. 11.

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

I, too, support amendment No. 11, which is obvious common sense. I am not at all happy with the aggregates levy. I was in Inverness last weekend and I must warn hon. Members that I shall be in Scotland again next week, so sinking England is driving us north.

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

We will make appropriate sea defences for the hon. Gentleman's visit.

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

Yes, sea defences for the invasion.

Coastal protection work is needed elsewhere in the British Isles and I can see no logic in simply increasing the cost of that as a result of the aggregates levy. If we cannot stop that misguided tax altogether, let us at least have the exemption that is proposed here for something that of itself serves an environmental cause.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I welcome this short debate and was glad to discuss the matter with Mr. Salmond this morning.

Let me begin by being blunt. I do not accept that there is a case for exempting virgin aggregates used for harbour sea defences or coastal erosion protection projects from the aggregates levy. The levy is designed to address the significant environmental costs of extracting aggregates, including dust, noise, visual intrusion, loss of amenity and damage to biodiversity. Those environmental costs are associated with aggregates used in coastal defences, just as they are associated with aggregates used in other construction processes.

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

Was not the levy initially aimed at the crushing of aggregates to the fine aggregates, which gave rise to the estimates of the impact of dust, while this measure is aimed at large boulders and rocks, which do not produce that much dust or noise when put into the sea?

Photo of John Healey John Healey The Economic Secretary to the Treasury 4:45 pm, 4th July 2002

I shall come to the rationale for the clause dealing with uncrushed aggregates, and treating them in the same way as crushed aggregates, which were part of the original legislation.

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

The Minister will confirm that the Government's original intention was not to include uncrushed aggregates within the levy. I understand that he says that the Government responded to consultations with the industry and so on, but if they are environmentally damaging, why were they not included in the original Government proposal?

Photo of John Healey John Healey The Economic Secretary to the Treasury

The nature of legislation is that it evolves. As the hon. Gentleman says, we are making this amendment as a result of points raised with us by the industry, which was concerned that not to do so would create opportunities for avoiding the tax and for unfair competition, to which I shall come in a moment.

The levy, in building in a recognition of the environmental costs of extraction, recognises those costs by making the price of aggregates better reflect their true social and environmental costs; encouraging more efficient use of aggregates; encouraging the use of alternative materials such as recycled materials and certain waste products in construction; and encouraging the development of a range of other alternatives, including the use of waste glass and tyres in aggregate mixes.

Photo of Alan Reid Alan Reid Opposition Whip (Commons)

Will the Minister explain where on a small island one can find those materials in sufficient quantities to substitute them for the aggregates that are being taxed?

Photo of John Healey John Healey The Economic Secretary to the Treasury

The hon. Gentleman will appreciate that we simply cannot devise a fiscal regime with a particular constituency in mind. This is a UK tax regime designed to apply consistently across the piece. It is not practicable to take into account arguments about whether a particular material is transported five miles or more in primary legislation.

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

Surely special island allowances in the fiscal regime, support for lifeline services or the passenger duty, are examples of where a fiscal regime has been tapered to meet social need and common sense, so why not do the same here?

Photo of John Healey John Healey The Economic Secretary to the Treasury

Social need and other objectives are often built into tax and duty legislation. However, Mr. Reid was putting the case of his own constituency, and that level of detail cannot be dealt with.

I have explained why the aggregates levy was introduced on 1 April this year and I want briefly to elaborate on why this Finance Bill brings into its scope aggregates that are extracted as uncrushed aggregates.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Will my hon. Friend elucidate for hon. Members such as myself who represent constituencies in the middle of the country? Who pays for coastal erosion projects, for example, on the island of Tiree, and have special island allowances been adjusted for the increased cost that might be incurred by coastal defences as a result of the aggregates levy?

Photo of John Healey John Healey The Economic Secretary to the Treasury

A feature of my hon. Friend's interventions during the passage of this Finance Bill has been a request for such factual information. An exhaustive list of the sources of support for such projects would take some time. They range from local authorities to special Government funds and, in the case of Scotland, the Scottish Executive would have a part to play.

Armourstone, the large blocks of aggregate that are often used in sea walls or coastal protection, was brought into the scope of the levy as a result of the levy's extension to uncrushed rock. That was a necessary change. Because aggregates can be produced from rock without crushing it, consultation with the industry suggested that there was a danger of distortion of competition and the distinct possibility of avoidance.

Photo of Alan Reid Alan Reid Opposition Whip (Commons)

The Minister referred to a distortion of competition, but we are talking about small islands. Does he seriously think that there will be two competing quarries on one small island?

Photo of John Healey John Healey The Economic Secretary to the Treasury

The operation of the levy will encourage much greater efficiency in the use of aggregates, which will help in the sort of circumstances to which the hon. Gentleman is referring. It will also help to encourage the use of alternatives to virgin aggregates and a reduction in the amounts that are used.

If coastal protection projects were to be exempt, as the amendment proposes, requests for exemption would inevitably be made in respect of other worthy projects such as the building of schools and roads, for which there may be the social case to which the hon. Member for Banff and Buchan referred.

Photo of Mr Roy Beggs Mr Roy Beggs UUP, East Antrim

I, too, represent a coastal area, and I cannot foresee any means of reducing the amount of aggregate that is needed to provide sea defences. Will the Minister tell us whether the Government plan to compensate those who will have the responsibility of providing sea defences by giving grant aid towards such defences?

Photo of John Healey John Healey The Economic Secretary to the Treasury

If the hon. Gentleman doubts that the levy can help to encourage those who are considering plans for such projects to reduce the amount of aggregate that is involved, he might like to have a word with the hon. Member for Banff and Buchan, as that is exactly what is currently happening as a result of the levy in the Peterhead bay project, to which he referred.

The Government are sympathetic to the fact that coastal defence projects are designed to protect the environment. We support such projects in a range of ways, but I must tell the hon. Member for Banff and Buchan that I do not propose that an exemption from the aggregates levy should become one of the ways in which we support such work.

The hon. Gentleman also raised with me the question whether an alternative source of support may be available through the Public Works Loan Board in relation to the Peterhead bay project. I am sympathetic to that idea. As he knows, I am sympathetic to the project itself and would not want it to be jeopardised. I understand that there may be some legal difficulties in securing a loan from the board, but I would urge the local authority to explore that option with the board as a way of providing extra support.

On that basis, I encourage the hon. Gentleman to ask leave to withdraw his amendment. If he is not prepared to do so, I ask the House to reject it.

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

I thank the Minister for those last few words. Hon. Members will understand that the bay project in Peterhead is very important to my constituency, not least because of the economic benefits that could flow from it in an area that has been extremely hard pressed economically, so I welcome his sympathy and support. I also freely acknowledge that his predecessor shared a similar opinion. I hope that we can find a way forward through other mechanisms and I accept his bona fides and word on that matter.

However, I hope that the Minister will not think that I am grudging if I wish to push the matter in principle. Although we agree that the project in my constituency and, no doubt, similar projects in other constituencies, are a good thing, a principle is involved, and I should like to spend a very few minutes explaining what I think is the disagreement in principle.

As I pointed out, the Government originally accepted that uncrushed, unmachined aggregates did not pose the same risk of environmental damage as machine-processed aggregates. They moved from that position only because it was suggested that there might well be areas of exemption and unfair competition. Indeed, if I had proposed in the amendment again to exempt unprocessed aggregates, that would have been a fair argument against it. However, the amendment suggests only that as coastal defences are a good thing for the community, they should be exempt.

I pointed out to the Minister that some 22 exemptions were already covered, and I gave some illustrations involving clay pigeons and other things. I have no quarrel with those exemptions and have suggested merely that approved coastal defence projects seem to me a legitimate exemption.

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

Did the hon. Gentleman notice that the Minister's strongest argument was that he was frightened of agreeing to add coastal defences to the list because someone else might want to be included on it afterwards? That is one the weakest arguments to have come from the Government. Obviously, the coastal defence issue would be defined by the fact that there were no alternatives.

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

That point makes itself.

I have a lot of sympathy with the Minister, as he has had to argue a very difficult case. His predecessor had exactly the same difficulty in Westminster Hall and in the Committee considering the statutory instrument. Ministers sometimes find themselves in that position, but they also have a wider responsibility. When a case appears very difficult to progress, it may be because there is something wrong with the argument that the Minister is being asked to deliver.

The case of the island communities has been made. Other legislation sets out special requirements for such communities and I see no reason why the Bill should not contain similar measures. In respect of the particular case in which I have a constituency interest, it is impossible to argue that environmental damage will be caused by taking materials from Stirlinghill quarry five miles along the road, with community support, and putting them in the breakwater to calm the harbour. There is no environmental concern in my constituency.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I appreciate that that may be the case in the hon. Gentleman's constituency, but perhaps he will also accept that it might not be the case in other parts of the United Kingdom. Would not a better way of addressing the issue be for those in Banff and Buchan, Tiree and other places to seek greater grant aid, rather than to change the basis of the tax system for the whole country?

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

I thought that I was doing quite well in gaining the Minister's sympathy with regard to the Public Works Loan Board. If the hon. Gentleman is suggesting that we up the ante for grants, I would be the first to agree. None the less, he has a fair point. When introducing legislation, we have to look for unintended consequences. If the Government had said that they were going to end up taxing coastal defences without having meant to do so and were putting in place fiscal help to compensate through grant aid, his point would have been well made. We are not in that position, however, and the reason for tabling the amendment progressing the case is to advertise to the Minister that there is a genuine problem that will affect my constituency immediately and will very shortly affect island constituencies. I suggest that it will also affect coastal constituencies throughout the United Kingdom. The problem needs to be dealt with in one way or another.

While I welcome the Minister's assurances and sympathy in relation to the Public Works Loan Board—the principle could perhaps be applied not only in my constituency, but to appropriate cases in a wider sphere—I would like to press the amendment in principle. I believe that coastal defences are a good thing and should not be taxed, because the community purpose that they serve will increase in future, not decrease.

Question put, That the amendment be made:—

The House divided: Ayes 161, Noes 263.

Division number 295 Orders of the Day — Finance Bill — [2nd Allotted Day] — Schedule 37 — Aggregates levy amendments

Aye: 161 MPs

No: 263 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Order for Third Reading read.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 5:10 pm, 4th July 2002

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

Five years ago, the Government's first Budget set out our objectives, our plans for reform, and the disciplines to achieve economic stability, higher employment and sustained prosperity. On 17 April, my right hon. Friend the Chancellor was able to report in his Budget speech that Britain had 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, Japan and Europe. In the year just ended, Britain had the highest growth of any of our major competitors.

Last year, the main economies of the industrialised world started a synchronised slowdown. In the past, during such slowdowns Britain entered weaker and suffered longer, unable to act because of higher inflation and higher borrowing. Britain has faced this world downturn with low inflation and sound public finances, both delivered by our new monetary and fiscal frameworks. This time, the Bank of England has been able to adjust policy at the right time and in the right way. Last year, it cut interest rates seven times.

With the support of fiscal policy, we have been able to safeguard economic stability and growth, and last year Britain was the fastest-growing G7 economy. The challenge for British industry and investors at this time is to build on hard-won stability and to accelerate productivity improvements, thereby increasing output, employment and prosperity. The economy has been stable, but it can and must grow stronger.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The Paymaster General is giving a eulogy on the Government's macro-economic performance. Will she say a few words about manufacturing? In the last four quarters, output has fallen; in the last six, manufacturing employment has fallen.

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

As the hon. Gentleman knows, expectations are rising and output was improving in the last quarter. As he rightly acknowledges, the long and hard position of the manufacturing industries is improving—[Interruption.] It ill behoves Opposition Members to make jests or to laugh from a sedentary position about the serious issues and considerations for the British economy.

I was stating the current position to the House and putting the Bill in that context. Clearly, it is important that we build on that increasing output, employment and prosperity, and there is a clear role for the Government in establishing the conditions necessary for that development, which must take place. The UK is—

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

If the hon. Gentleman is patient, I shall give way later.

The UK is, and will remain, a low-tax environment, and the Bill introduces important measures to modernise tax, keep pace with real-world developments and the global economy, promote enterprise and cut red tape.

Photo of Adam Price Adam Price Plaid Cymru, Carmarthen East and Dinefwr

I am grateful to the Paymaster General for giving way. She knows, of course, that manufacturing output is down 6 per cent. over the last year whereas retail spending is up 6 per cent. Is that not a case of simultaneous boom and bust?

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

It is necessary that the Government establish the right framework and the stability for that growth. Of course, investment, which is very much part of the Bill, is a key driver of growth. To encourage more investment, we have, in past Budgets, cut corporation tax from 33 to 30 per cent.—the lowest rate in our history. To enable investment in high-growth, high-technology industries, clause 53 and schedule 12 extend and enhance the research and development tax credit to all companies. That means a £400 million boost for innovation and research.

Clause 44 and schedule 8 specify an exemption for companies disposing of substantial shareholdings. That will enable them to restructure without an essential business decision being constrained by the tax system. The new relief forms part of the Government's commitment to reforming and modernising the corporate tax system, and ensuring that the United Kingdom remains a good place in which to do business.

The Bill establishes a new regime to provide relief for the cost of intangible assets, including intellectual property and goodwill. The relief proposed in clause 84 and schedules 29 and 30 will encourage business to take advantage of opportunities in the knowledge-based economy. That is another important step in our programme of corporate reform, ensuring that our tax system supports, encourages and reflects the change in the business environment.

Photo of John Redwood John Redwood Conservative, Wokingham

When the Government imposed their big windfall licence fee on the telecommunications industry—a very big one-off tax—I warned that it would lead to job losses and slashes in the investment programmes of our lead sector. The Government said it would not. Will the Minister now apologise and explain what went wrong?

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

The right hon. Gentleman has made many forecasts that turned out to be wrong. If there is a list of apologies that need to be made to the House, we may be here for a long time hearing members of the last Government apologise for all their errors.

In clause 91 and with the reforms of North sea oil taxation, the Government recognise the need to strike the right balance between a fair share of profits for the nation from the exploitation of a scarce resource and the encouragement of investment. The 100 per cent. first-year allowances on capital expenditure, along with the commitment to abolish North sea royalties and the supplementary 10 per cent. charge, strikes that balance.

Small businesses account for 55 per cent. of all private sector jobs, more than 10 million, and for nearly half the economy's output. Small firms are important drivers of growth and support for them is an important theme of the Bill. In 1997 we cut the small companies tax rate from 23p to 21p in the pound, and in 1998 we cut it again to 20p, with a starting rate of 10p. Now, in 2002, clause 31 lowers it further, to 19p, with immediate effect.

Clause 32 proposes a fall in the starting rate for corporation tax from 10 per cent. to zero. That means that companies with profits of up to £10,000 will pay no corporation tax, and that the tax regime for small companies is more favourable than those of any of the other advanced industrial countries.

To fund the growth of our young companies, we need to increase business investment. Private equity investment has doubled since 1997, which is an important contribution to an entrepreneurial economy. But there is more to be done, and to maintain the momentum the Bill cuts capital gains tax to 20 per cent. in respect of business assets held for a year or more. In the case of business assets held for more than two years, it cuts the tax to 10 per cent. That means that, overall, Britain's capital gains tax regime is more favourable to enterprise than that of the United States.

I know that for many small businesses the cost of compliance is important. The Budget set out proposals to reform the administration of VAT, to help smaller firms comply with PAYE, and to remove unnecessary regulation. Clauses 23 to 25 set out the steps we are taking to simplify and streamline the VAT regime.

In disadvantaged areas too, however, businesses can be a catalyst for community regeneration. In recognition of that, in 2000 we designated enterprise neighbourhoods. Small business tax cuts will be supported by further measures to encourage social entrepreneurs. We introduced the community investment tax credit, creating an incentive to invest in disadvantaged communities.

The emerging consensus on the idea of sustainable development is also an opportunity for British companies. Investing now in energy-saving technologies and techniques is the best way of getting ahead of the game and gaining an important advantage over our foreign competitors. Investment in energy-saving technologies will qualify for enhanced capital allowances at a rate of 100 per cent., strengthening our economy as we move towards our Kyoto targets. Incentives will also be introduced to drive cleaner vehicles, with a reduction in the licence fee of £30 for the most efficient cars, £55 for the least polluting vans and £35 for the least polluting motor cycles. This is a balanced approach, taking into account the needs of the economy and our communities and the need for secure employment.

To ensure fairness for taxpayers and for business, we must act swiftly to close tax loopholes and be vigilant against tax avoidance. We have decided to act with immediate effect on the avoidance of stamp duty on property and to put an end to artificial schemes for VAT avoidance.

The United Kingdom remains a low-tax environment, favourable to business and enterprise. That has been acknowledged by a wide range of surveys and reports from business management. The Institute of Management development study, published recently, states that the United Kingdom has better withstood the uncertainties of the global economy. The Government have put in place a comprehensive set of measures aimed at raising competitiveness and closing our productivity gap with our major competitors.

Another survey, conducted earlier this year, said:

"In our analysis of the business environment the United Kingdom and the United States of America stand out as leaders in the environment they provide for growth companies."

The Bill promotes investment in our families and communities, in those who are disadvantaged, in enterprise, in the future growth of the British economy and in the national health service and our public services, providing for the people of the United Kingdom security, opportunity and a future in which they will be able to contribute to a growing and flourishing economy. I commend it to the House.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 5:23 pm, 4th July 2002

The Bill is, to use the old cliché, something of a curate's egg. There are certainly some good things in it, such as the simplification of the VAT regime for small business, the modernisation of business taxation and, we hope, the capital allowance regime for larger companies—we hope that the one for smaller ones will not be too complex to be effective. I thank Treasury Ministers for their courtesy in Committee, where we underwent a useful process and some issues that we raised were noted for inclusion in the Bill.

However, some bad things remain, and some for which the case was not made at all in any of our debates. I do not intend to repeat the exhaustive debate that we had on increased taxation on North sea oil exploration yesterday, but we remain powerfully convinced of the view that it will damage Britain's interests and greatly reduce extraction of the oil that remains there, at a time when our current account position is already the worst it has been in our history. I noticed that there was no response to the crude point that the loss of output will add on average about $12 billion a year to our current account deficit, although I am not saying that the tax increase is the only cause.

Yes, we all like small business, which is the majority employer. A small tax will be popular, and we must all like it, but it is unwise of the Government to forget about the self-employed, because self-employment is crucial. The ability to make a living through self-employment has been one of this country's strengths, particularly in difficult economic circumstances. All measures tend to have contrarian effects if they are not thought through, but as we have argued, masses of modest self-employed people will have to queue up to incorporate, in order to gain—potentially—£3,000 or £4,000 a year in tax terms. The costs will be a lot greater than the Government estimate, and it is not desirable for small self-employed businesses to incur yet more regulatory costs and hassle as a result of incorporation. It would have been better to balance fiscal incentives for small businesses between the incorporated and the unincorporated.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

Does the hon. Gentleman share my surprise that this is one tax cut for business that many people do not welcome? However, they do not welcome it because, as he says, it might distort choice in an unplanned and unstrategic way.

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

Indeed. Many self-employed people tell me that they thought they were getting a tax cut, only to discover that they are not. They ask me what they should do to get it, and I tell them to get an accountant. To be candidly cynical for a moment, the Government have not got the bang for their buck from the small business community that they perhaps expected. The point is one of principle: if the objective was pure, there should have been a mixed reduction involving the incorporated and the self-employed, rather than a reduction weighted entirely in one direction.

The Government may regret their approach to stamp duty. It is fine and correct to attack tax avoidance, but the basic issue is whether it is right and economically sensible for business to pay 4 per cent. stamp duty. That has not been a huge issue until now because there were many schemes through which to avoid such duty; indeed, many businesses believed that the Government regarded such schemes as an incentive for business. Whether there has been a change of policy or merely a waking up to it, the fact remains that a business's physical assets— the property—are just as much of a component as the machinery and the people. Taxing them more will lead to less mobility and greater costs.

We have debated the unfortunate principle of the alcopops tax, whereby it is okay to proceed with a tax based on data that prove bogus. On green fuels, green taxation and car legislation, I do not understand why the Government did not include liquefied petroleum gas in the incentives. Some of the fiscal arrangements, particularly those relating to company cars, may prove mind-blowingly complex.

We had a strong debate on mandatory e-filing. Of course, technology advances and we will all comply with it, but regardless of the intention, it must be wrong to begin by saying that we will force everybody—businesses, little old ladies—to file tax returns electronically. The underlying mindset is unnecessarily authoritarian.

I apologise for not being present when controlled foreign company legislation—the Jersey clause—was addressed in detail. I strongly object to two aspects of CFC legislation. First, it is bad for the UK as a multinational base for business. Whatever the Government may think, we are becoming less attractive in terms of tax and regulations, and are slipping down the competitive league table. If multinational companies based here become subject to an arbitrary power to change the tax rules governing their international operations—in other words, if the Treasury suddenly has random power to decide that they would not get the CFC exemption—they will face a disincentive to doing business. Arbitrariness of any sort is undesirable.

Secondly, I believe that one element of the legislation has been mis-sold, as there is widespread support for the savings directive. It was the alternative to the silly proposal that is the common EU withholding tax, and it was effective against tax evasion. However, the Opposition certainly do not like the notion of EU tax harmonisation, and elements of the EU unfair tax competition code lean in that direction. I want this country to retain its autonomy to set taxes as we wish, as a way of encouraging what we want to encourage. Competitive taxation is healthy: anything that compromises that rather invites a tax cartel.

Finally, 30 years ago huge negotiations took place with regard to the Channel Islands. They had a degree of independence, and they remain outside the EU. I do not like the UK exerting back-door leverage to bring them within the ambit of EU initiatives. Given their particular relationship with the UK, there is some justification for that approach when it is in Britain's interests, but not when it is used to get around, by the back door, a position settled 30 years ago.

The Prime Minister visited Jersey in June. I was amazed to read that he said Jersey had its own rights in this situation, that the Government would protect them, and that the Government were not trying to affect tax rates. Either the Prime Minister does not know what he is talking about, or he was being deliberately misleading.

It was a pity that the new clause on the tax law commission did not get selected for debate. The exercise of trying to rewrite tax law more simply has had some success—

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

Order. The hon. Gentleman must not comment on Third Reading on a new clause that was not selected for debate.

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

Let me put it another way, Mr. Deputy Speaker. We are faced with 505 pages of taxation—surely it is possible to have tax rules that are simpler and more comprehensible. It is a question not merely of drafting tax law more simply, but of establishing bodies that would contribute to simplifying our tax system.

The Bill does not address the pension crisis that we face and that is largely a result of the Finance Act 1997. I shall not repeat what was said in yesterday's debate, but I hope that the Government took note of the growing concern registered by the financial community, citizens and others at the growth in off-balance-sheet, Enron-style accounting.

People are also worried by what can only be described as the tangled web involved in getting public sector investment off the balance sheet. It seems that tax vehicles are being shaped to meet the rules rather than the substance, and I wonder whether the Government know the full extent of the liabilities that are lurking in wait. If not, given the difficult economic times, some extremely unpleasant things could happen.

Above all, the Budget in aggregate is bad for business, and it is bad for business at the wrong time. It will do some helpful things to encourage research and development, but it also imposes massive increases in employment costs on business, just when business and enterprise face considerable problems. At the root of the problem and the reason why the stock exchange has been collapsing is the problem of corporate profitability. If anything, corporate profitability is contracting. Companies are finding it increasingly difficult to sustain profits, let alone increase them. Continually adding regulatory and fiscal costs to business produces a downward spiral which will then reduce pension fund values and investments still further, and so forth.

The Chancellor thought, as ever, that he was very clever with his Budget. He went out to the focus groups who said, "Yes, we quite like the idea of hypothecating extra national insurance to pay for more health care." I think they also said, "We certainly agree with more spending but, like the Conservatives, we do not agree that more spending will be effective without the necessary reforms." The Chancellor sold the whole package on hypothecation: more money to pay for more health expenditure. The figures, however, show that half of it is not that at all.

There are £4.7 billion-worth of tax credits, bringing the total tax credit cost up to some £16 billion. As we have pointed out, those tax credits will discourage pension saving for many and are in danger of providing excess job subsidies, militating against skill training and increased productivity. It may be no accident that after four years of the working families tax credit we are now seeing productivity declining. We have not only the lowest productivity growth for some time, but falls in productivity when for five years the Chancellor has gone on saying that his Government will increase and improve productivity.

It is no use spending huge sums on health unless those amounts will be effective. As we have said again and again, a package of increased spending without the necessary reforms should not be supported. The crude fact that in Scotland, Northern Ireland and Wales, where spending as a proportion of national income is already above European levels, delivery is even worse than in England is straightforward evidence that reform is needed. We hear of more administrators than beds and only 17 per cent. of new expenditure going to front-line delivery. Those have all the hallmarks of the inefficiency of nationalised industries the world over. The risk is that all that expenditure will in reality go on wage increases.

In an entirely different area, the problem is becoming more apparent of the black hole in the Chancellor's plans—something like £7 billion. Indeed, it was heartening to find the Government's own new economic adviser at the Department of Trade and Industry, Vicky Price, warning publicly that the Government may be about to embark on too much spending which they will not be able to finance. The expectation is that quite soon taxes may have to increase again. Apparently the Chancellor said that he thought the statement was a spoof. Perhaps it is he who is out of touch and not the rather tough and honest speaking new economist at the DTI.

Productivity is falling. London job prospects are the worst since 1993. Tax receipts are declining for the first time in nine years. Corporation tax receipts are down 12 per cent. and Inland Revenue receipts down 7 per cent. Hearing the rosy picture which the Paymaster General described, who would imagine that we had a crashing stock market? Of course, it happens just like that. Stock markets are not at all predictive, are they? That is not their role. But what the stock markets are telling us is that corporate profitability is vulnerable and falling. That is the key point. The worst aspect of the Budget overall is that it will be bad for business, as business has made clear.

We have heard all the spin about the Government's wonderful finances. That is the point of raising the off-balance-sheet issue, because however one looks at it—whether one talks about sticking to the rules rather than the substance, or potentially breaking the rules—all that has been happening is that the capital expenditure side is being hidden off balance sheet. People know that. There may be several benefits in involving the private sector, but everyone knows that in reality the state of the public finances is not the rosy picture that is painted by the Chancellor.

Yet again, we had a clever-clever Chancellor's Budget. It got all the headlines that he wanted on the day, but now people are focusing on realities such as their declining pensions, businesses weighed down with tax and regulation, and the problem of sustaining profitability. This morning I turned on my radio as I was getting up and the chap said, "Yes, the Chancellor's going from boom to bust." One of the problems with allowing the savings ratio to fall so badly is that when it recovers—and it will recover in a recession—consumption falls by too much. The Chancellor has presided over a period in which overall saving has declined too much, consumption has risen too much and the external balance has gone to hell; and the time will come to pay the price for that. It was an arrogant and unwise Budget. The details of the Bill are good and bad, but there will be a growing mess for us to sort out in due course, and the Government will need more than the ability to deliver a bad case in an eloquent fashion.

Above all—this is why we are going to vote against the Bill—there has been a foolish arrogance as regards the whole issue of North sea oil taxation. The resource of North sea oil is not the family silver in the Treasury, but one of nature's great gifts of good fortune to this country. The new tax measures mean that instead of managing it to make the most of it, we are going to under-exploit it. That will be to the country's disadvantage over the coming years.

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East 5:43 pm, 4th July 2002

Thank you, Mr. Deputy Speaker. I am glad to have caught your eye in the twilight of our deliberations on the Budget and to be able to make a further contribution to the debates on the Finance Bill as it proceeds through its final stages towards enactment. As a Back Bencher new to the ways of the Budget and to the intricacies of the tax-raising powers of this House, I feel privileged to have been able to make contributions at every stage of the Budget process.

I am glad to have witnessed at first hand the nature of the response by Opposition Members to the proposals brought to the House by the Chancellor in his Budget on 17 April. There has not generally been a great deal of heat in the arguments that they put forward, despite the contribution just made by Mr. Flight, but sufficient light has been engendered in Committee and on the Floor of the House for us to recognise that although there have been genuine areas of disagreement, the many positive aspects of the Budget have met with general agreement.

The Budget was carefully crafted and constructed not to deceive the British people but to create a fairer and more efficient tax regime that will benefit the majority of taxpayers, investors and companies that contribute so much to the well-being of the economy and to the UK's continued economic health and prosperity. I firmly believe that, as the Paymaster General said, the initial view of many of the informed commentators who voiced opinions on the nature of the Budget will be fully substantiated: that view was that it was a defining moment in the life of this Government.

The major issue of this Budget is close to my heart, close to the heart of the labour and trade union movement of which I am a representative and, indeed, close to the hearts of my constituents and all those who believe in Britain: it is the health and well-being of this country in the widest sense. The future of the national health service and how it will be financed was certainly the major focus of the Chancellor's Budget.

I shall take up the points made by the hon. Member for Arundel and South Downs. In the past two to three years, the people in my constituency have noted the much improved health service in Scotland. We have done away with the internal market. We have reorganised the service in Scotland to provide a sharper, leaner service, and I believe that the money coming from the Budget will obviously deal with many of the criticisms that have been levelled at the Scottish NHS and ensure that the services are delivered properly.

I shall not linger on this, but there has to be recognition of the fact that rates of illness are obviously higher in Scotland. There is a need for greater spending given the higher levels of cancer and coronary heart disease. It is right in a country that cares for all its component parts that the Government should take account of that in their Budget formulae.

Leaving that aside, the Budget was certainly crafted to ensure not only that the NHS survives but to secure the health of Britain's poorest communities, the health of the British economy and the health of this country's companies and corporations—the sinews and muscles of Britain's economic health.

I am certain that, just as the people's Budget at the beginning of the last century laid the foundations of Britain's nascent welfare services, in bringing the Budget proposals to the statute book at the beginning of the new century, this Finance Bill will reaffirm this Government's and this nation's belief in and commitment to modern, inclusive welfare provision, where wealth and opportunity are in the hands of the many, not the few.

The Government and the Chancellor have clearly indicated the need for a process of redistribution to ensure the vitality and the very existence of Britain's poorest, most disadvantaged communities and social groups, so that they are given an injection of assistance and support, delivered, in the words that Winston Churchill used when Chancellor of the Exchequer, via the ambulances of state aid.

Many fellow Members of Parliament will welcome those Budget provisions that directly relate to their constituencies, be they the community development tax credits and community development funds; the new incubator funds to help new innovative companies to grow; the removal of the stamp tax on the sale of property in Britain's most socially deprived areas—I am glad to say that my constituency will be one of those that benefits most from those innovative provisions—or the encouragement of small business start-ups and enterprise. All those provisions will help areas that have suffered significantly through urban and social change and economic decline to begin to make serious starts to regenerate themselves.

I believe the Budget proposals in the round are to be welcomed. They clearly show the political differences between the two major parties, despite the many agreements that we have had in Committee and on the Floor of the House. The Government believe in social justice, equity, enterprise and opportunity, but the Opposition put business first, not the people. In Committee, the Conservative party defended the tobacco industry, just as Conservative Members have today defended the drinks industry. They have promoted the abolition of inheritance tax and the complete removal of the stamp tax, while opposing the Government's prime proposal to improve this country's health service.

Politics can best be defined as the battle of two conflicting groups of ideas, struggling to achieve popular endorsement for policies and programmes. The Budget has been branded as unwise, but the British people have clearly indicated their massive endorsement of the Budget proposals—even a majority of Conservatives endorse them—and by implication accept the means by which they are to be funded. In a question asked recently at Prime Minister's questions reference was made to our all being Thatcherites now, but the Budget and the Labour party's stewardship of the nation's finances invite us to beg to differ.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister) 5:49 pm, 4th July 2002

May I start by agreeing with a major point made by Mr. Flight? He said that the Paymaster General's opening remarks describing the performance of the British economy and its management under the Government were far too rosy; I would say that they were Panglossian. There may have been successes in the last five years, particularly Bank of England independence and the increased stability that that has given to monetary policy, which Liberal Democrats have welcomed on many occasions. To suggest that the whole picture of the macro-economy is rosy, however, is far from the truth.

I suggest to the Paymaster General that, rather than simply reading the briefing from Treasury officials, she should go to the House of Commons Library to read the latest research paper on economic indicators, published this week. Merely browsing through that will show her that a whole range of indicators are flashing red, which the Government appear to be ignoring totally. I was therefore very worried by the right hon. Lady's speech.

Manufacturing output has fallen in the last five quarters. Indeed, in 2001, it fell by 2.3 per cent. We can also consider other industries, such as agriculture, hunting and fishing, whose output has of course been falling for many quarters; it fell in 2000 and 2001, and it fell in the first quarter of this year. Other industrial sectors show similar falls. Manufacturing is perhaps the most worrying because of its importance to the tradeable sector. We have seen large falls in that sector, especially in manufacturing employment, which fell in 1998, 1999, 2000 and 2001, and is falling again this year. In fact, manufacturing employment is falling at around 5 per cent. a year, while manufacturing output is falling at 6 per cent. a year. Can the Government be proud of that?

I remember that, when the Chancellor of the Exchequer was in opposition in his role as shadow Chancellor and, prior to that, as the Opposition spokesman on trade and industry, he was on the television night after night talking about manufacturing—manufacturing investment, manufacturing output and manufacturing jobs. Under his stewardship, however, we have seen declines in all those areas. He does not have a record of which to be proud.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

I had not intended to intervene at this stage. I must point out, however, that when my right hon. Friend the Chancellor was making those points in opposition, it was in the context of interest rates of 10 per cent. or 11 per cent., which are debilitating to manufacturing industry. The fact is that we have the lowest interest rates for 40 years, which is testament to the success of the Government and to my right hon. Friend's policies.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The hon. Gentleman is right about interest rates. The problem with the Government's management of the economy has been a totally benign approach to the exchange rate.

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

With respect to the hon. Gentleman, he is wrong about interest rates. As soon as we came out of the exchange rate mechanism in 1992, interest rates fell like a stone, and they were miles lower than 10 per cent. while the Chancellor of the Exchequer was making his points throughout the period from 1992 onwards.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I would caution the hon. Gentleman about intervening too much to praise the Conservatives' record on managing the economy. I am afraid that I will not agree with him on their overall performance, given that we saw debt triple and years of high interest rates.

I was focusing on Labour's record. Because of the high exchange rate—which is still too high—the manufacturing sector has been haemorrhaging jobs.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

Can the hon. Gentleman tell the House how the Liberal Democrats would engineer a devaluation of the pound to help manufacturing industry? I know that that is a very dangerous thing for any Government to do. I presume that the reason why the Liberal Democrats claim that they can do it is that they will never be the Government.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

We have argued consistently—it is not a new argument but one that we have been making for many years—that if the Government had a positive approach to joining the single currency and gave us an indication of when the referendum would take place, the foreign exchange markets would push sterling down to a competitive rate.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

As the hon. Gentleman says, however, the signalling effects have been proven, not just in the case of the UK but in the case of Italy when it announced that the lira would join the single currency. There was a sensible, slow, gradual and sustainable depreciation, so that the lira could move in a competitive way into the single currency.

Directly after the general election, the markets perceived that the Government, who had kept their large majority, might be more positive about their approach to, and timetable for, joining the single currency, and the foreign exchange markets reacted to that by putting downward pressure on the exchange rate. The Treasury stepped in to say, "Hold on a minute. We have no intention of joining," and tried to scupper the rumours, and it was only then that the pound went back up again. That proves my point entirely.

The Government have failed to give a clear lead on the exchange rate and so must take the blame and the responsibility for many of the thousands of jobs that have been lost in manufacturing. Let us remember that 500,000 jobs have been lost in manufacturing over the past five years.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I represent a constituency in the west midlands, the manufacturing heartland of the United Kingdom. In contrast to the hon. Gentleman's view, it seems to me that the cross rates between sterling and non-euro currencies show that the problem is that the euro is too low rather than that the pound is too high. Does the hon. Gentleman disagree with that analysis? If so, what level does he think the pound should be at?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

When we carried out a review with a whole range of independent economists who were experts on exchange rates, we published a guideline on the sort of range at which the pound could join the single currency. We challenged the Government to provide their range and enter the debate. That is how we should start to consider and face up to the issue. The Government's failure to do that concerns me greatly.

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

Since the hon. Gentleman has focused on this territory, will he complete the story? The Chancellor and the Treasury are terrified that, if sterling were to depreciate significantly, inflation would be imported into this country, interest rates would rise and the housing market would crash. The Government would then become the most unpopular of all time. That completes the circle.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The hon. Gentleman is almost beginning to suggest a conspiracy theory which says that the Government are deliberately not acting because of the housing market. I am not sure that that is the case. The Government do not control interest rates; they rightly gave power over them to the Monetary Policy Committee, which has the difficult task of trying to judge the balance between the external side and the domestic side and to deal with the dilemma of domestic inflation in sectors such as the housing market and external deflation in the tradeable sector.

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

The hon. Gentleman has missed the point. The Bank of England will certainly continue to control interest rates; but given the state of the economy, the Government know that if they talk down sterling, inflation is likely to increase. If inflation increased, the Bank of England would be obliged to put up interest rates. If interest rates were put up in the current property market, with many people dangerously over-borrowing at low rates of interest, there would be the risk of a crash in the property market. That is the circle.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The hon. Gentleman is wrong. Many people in the Treasury and the Bank of England would like a readjustment of monetary policy in exactly the way that he describes—a lower exchange rate and a higher interest rate. That would probably be a much better solution. The Government could engineer that if their policies on the euro were much clearer, but the examples that I have given show that their failure to go down that route is leading them into a dangerous position in which the housing market is being allowed to overheat. That will store up trouble for the future.

Photo of Michael Jack Michael Jack Conservative, Fylde

On a point of detail, the Government in fact retain control of monetary policy by virtue of the fact that they set the target for inflation. Section 11 of the Bank of England Act 1998 requires the Bank and the MPC thereafter to hit that target. If the Chancellor wanted to affect the range of interest rates, he could, if he so wished, change the inflation target.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The right hon. Gentleman makes a valid point, and I refer him to the report of the Committee that debated the Bill. I served on that Committee and argued for target independence for the Bank of England, so that the Monetary Policy Committee could set its own targets instead of the Chancellor doing it—in the same way as the European Central Bank does. I argued that because if the markets think that the Chancellor may use that remaining power to set targets and thus affect interest rates and the exchange rate, that will undermine the credibility of the inflation rate.

Long-term interest rates show some evidence that we are still paying a premium in the UK. We have slightly higher long-term interest rates than many other of our competitor countries. That slight premium exists partly because the Bank of England does not have target independence. [Interruption.] If hon. Members wish to dispute that, I am more than happy to show them some of the figures that I have seen. I also refer them to the recent article in the Financial Times by Chris Huhne, a Liberal Democrat Member of the European Parliament.

Photo of John Redwood John Redwood Conservative, Wokingham

If the hon. Gentleman cares to check today's Financial Times, he will see that the long bond yield in Germany is slightly higher than the long bond yield in the UK. He has only to read it.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The House of Commons information document on economic indicators, which was published this week, shows that on 10-year Government bonds, the figure for the UK is 5, in the US it is 4.83, in Switzerland it is 3.21 and in Japan it is 1.25. My point is backed by the evidence in the latest publication from the Library.

The Government's rosy picture of the economy is complete nonsense. Indeed, the whole strategy behind the Bill is very worrying. In the Budget, the Chancellor increased his forecasts for the underlying growth rate of the economy. He did that to try to balance the public finances. By increasing the underlying rate of growth by just 0.25 per cent., the Chancellor found £4 billion or so over the forecast period.

The change in forecast is highly contestable, for reasons to do with the overall performance of the economy that I have discussed and, if one looks at the background documents published at the time of the Budget, the overall rationale behind it. On Second Reading, I asked why the Government had not chosen the central forecast from the Government Actuary's Department. The rationale for increasing the growth rate was that the population was increasing faster than had previously been expected. The Government relied on the report from GAD for that information. However, instead of taking the central forecast from that report, the Government chose a figure in the mid-range between the central forecast and the most optimistic forecast. By doing so, they tried to provide an explanation for increasing the underlying growth forecast.

I received no reply when I asked why the Government had decided to make that change. It was arbitrary and stealthy, and the only way in which the Chancellor could balance the books. I am concerned by that. The Government's positive spin on the performance of the economy is very worrying, because they are misleading themselves into believing their own public finance forecast.

I support the Government on one major change: the increase in taxation to fund the extra health spending, which is key to the Budget. My hon. Friends rehearsed the argument in favour of such a policy on Second Reading of the National Insurance Contributions Bill and elsewhere, although we would not raise the money in the same way. Income tax is our preferred route because it would be fairer and more efficient. It would not hit employers and would ensure that people who enjoy high investment incomes pay their fair share.

The fundamental question that the Conservatives have ducked is whether they support the extra money for the health service. That is the key consideration. We have campaigned for that increase in spending for many years. It is one reason why we voted against Third Reading of the Finance Bills in 2000 and 2001. It would be hypocritical to vote against Third Reading today because the Government have done what we have been calling for, albeit with significant differences. The basic thrust is right, however, which is why we support them.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

The hon. Gentleman's comments highlight the often two-faced nature of Liberal Democrat politics: on the one hand, he criticises the Government on manufacturing industry and is concerned about the predicament that it faces; on the other, he supports tax increases that place a huge additional burden on manufacturing industry. Can he explain that?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The hon. Gentleman has not been listening. When we debated the key problem facing manufacturing, I spoke about the exchange rate. Had I spoken about the rate of taxation, he would have a point, but the key problem facing manufacturing is the exchange rate because they are the major exporters in our economy. He need only talk to a few manufacturers to know that. It is possible to be in favour both of a higher rate of tax to ensure that the health service has the money that it needs and of an exchange rate that is competitive and assists our exporters, which is why we support the euro.

There are a few problems with the details of the Bill—the North sea oil issues and the freeze in personal allowances, for example. I think that the cut in the starting rate of corporation tax to 0 per cent. is a mistake, as the hon. Member for Arundel and South Downs explained. However, the Bill contains some good measures, such as those on amateur sports clubs, the tidying up of film tax relief and the streamlining of VAT.

It is worth focusing on one significant aspect of the Bill and the Committee proceedings. Some 60 per cent. of the Bill—300 pages—was published in draft form for consultation. That is a major and serious change. It should be welcomed by hon. Members on both sides of the House and should be repeated and extended. Conservative and Liberal Democrat Members have said that one major problem is the complexity and vastness of tax legislation. By publishing things in advance we can ensure that the professionals have a chance to make comments to us and the Government so that many of the problems are ironed out by the time the Bill is introduced. For that reason, the Committee proceedings were relatively uncontroversial. There was much agreement among hon. Members and excellent work was done, not least by the hon. Member for Arundel and South Downs, who did an exceedingly good and thorough job.

The Government have some way to go on the simplification agenda. The Bill adds some complexities. They should continue some of the good work but also go much further. I have a radical suggestion to make. One reason why we have an annual Finance Bill is the Provisional Collection of Taxes Act 1968. We do not need a huge Finance Bill every year. One reason why the tax system is so complicated and weighty is that the Chancellor, Customs and Excise and the Inland Revenue want to get their sticky fingers on the statute book every year. We should move to a system in which a full Finance Bill is introduced every other year. That would enable the Government to undertake even more consultation on draft clauses. In the years when we did not have a proper Finance Bill, we could have a small Bill that followed the Provisional Collection of Taxes Act, to make sure that income tax and corporation tax could be collected each year. That would mean that we would not keep adding so much extra taxation legislation every year, which by its nature has a degree of complexity.

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

First, I thank the hon. Gentleman for his kind comments. Secondly, I say, "Dear God, not 1,010 pages every other year!"

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I am grateful for the hon. Gentleman's intervention. If we moved to a biennial Finance Bill, I would not want that Bill to be twice the size of the present annual Bill. The purpose of the idea is to stop the tax legislation juggernaut. I think it would complement the way in which the Government are now trying to consult.

Having spoken for 38 minutes on Second Reading, I promised myself that I would not speak for so long on Third Reading. I intend to draw my remarks to a close.

I am delighted that the Government did a U-turn by understanding that taxation needed to increase if we were to make essential investments in our public services. I have some concerns about the amount within the economy as expressed. Similarly, I have some concerns about the way in which the Government are presenting their public finances. However, overall it was a tax rise that was needed both by the health service and to ensure that our public finances are on a secure footing. For that reason alone, we shall be giving the Bill our support in the Lobby.

Photo of Michael Jack Michael Jack Conservative, Fylde 6:11 pm, 4th July 2002

This has been an interesting Finance Bill, first, in terms of the personnel who have dealt with it on both sides of the Committee and on both sides of the Chamber. I associate myself with the remarks of Mr. Davey about my hon. Friend Mr. Flight. He did a remarkable job, in many instances singlehandedly, speaking with a rapid-fire delivery about incredibly complex matters, which he at least followed. Occasionally, the rest of us were left trailing verbally in his wake, trying to keep up with his flow of intellect. He did the proper job of probing the Government sometimes on their more technical measures, leaving the more salacious parts of the Bill to lesser beings sitting behind him.

I acknowledge the excellent work that was carried out by my hon. Friends Mr. Hoban, for Cities of London and Westminster (Mr. Field) and for Epsom and Ewell (Chris Grayling), who were considering their first Finance Bill. They performed an admirable task.

On the Government Benches there was a sort of game of musical chairs. We started with the Financial Secretary who became the Chief Secretary, while the Economic Secretary was promoted to be the Financial Secretary. In the past few days, we had the pleasure of welcoming the Economic Secretary to the Treasury, John Healey, as the new kid on the block. I tried my very best to try to read the new body language of Treasury Ministers, not always with great success. However, I think we learned something about what goes on in their minds by their demureness and the way they communicated with us.

Rob Marris marked himself out by developing an interesting line of asking the uncomfortable question but without quite getting himself into the uncomfortable position. The Government have found someone on the Labour Benches who is prepared to ask the difficult question, and the Bill's scrutiny was made the stronger as a result.

For a moment, I shall take up the thoughts that have been expressed by those on the Opposition and the Liberal Democrat Front Benches about the complexity and length of legislation. With no disrespect to those who have spoken of the subject, perhaps they did not press the Government to give us a definitive statement. A Bill of more than 500 pages and in excess of 125 clauses illustrates that we have added much more legislation to the statute book, and it shows that the world is a complex place and that tax law reflects it.

I would not go so far as the hon. Member for Kingston and Surbiton and suggest that we should have a biennial Bill. Sometimes there are people who seek to avoid their just deserts. A Finance Bill must move quickly to secure the revenues for whichever Government were legitimately elected. Over the years, I have received representations from the Chartered Institute of Taxation, the Institute of Chartered Accountants in England and Wales, the Confederation of British Industry, the British Chambers of Commerce and many other individuals and organisations, all of whom, notwithstanding the tax law rewrite exercise, call for work to simplify our tax system and to improve its scrutiny.

The publication, "Towards a better tax system", issued by the Institute of Chartered Accountants, points out that the Finance Bill of 1978 had 75 clauses and the Finance Bill of 1999, 140 clauses. In 1978, 53 clauses were debated, but in 1999, only 42 were debated, which illustrates a scrutiny deficit that has crept into our proceedings. For perhaps understandable reasons of pre-legislative scrutiny, we did not go through every single clause in the current Finance Bill, but the time has now come for the Treasury to consider bringing together representative bodies who have made representations and, more importantly, have ideas about ways in which the operation of the tax system could be improved beyond the rewrite exercise. Discussion of the rewrite is timely, as next week a new measure on the topic—the second—will be published, demonstrating the totality of part of the tax universe. When preparing a Finance Bill, no Treasury Minister ever sees all the relevant parts of the Taxes Act 1988. Those Ministers only see one bit and consider one set of implications. Only when the rewrite is submitted can we see the enormity of their proposals.

It is time to assemble a body under Treasury chairmanship, including parliamentary representatives with an interest in the subject and, more importantly, practitioners, to try to map out an agenda to simplify the tax system and improve its operation. The idea that simplification can do the surgeon's job of cutting chunks wholesale from the tax system is not realistic. The Government, and indeed the previous Government of whom I was a member, have always looked for opportunities to remove unnecessary legislation. Making legislation work better and making it more understandable, however, as well as the need to consider the effect of the tax code on the economy, provide a perfectly legitimate opportunity for people involved in tax to have their say.

I should be grateful if the Financial Secretary in her winding-up speech nodded in that direction, and accepted the need for the Treasury to consider a meeting of interested parties to try to find a way forward. There is universal support for that, and not of a party political nature, deriving from a genuine and rational wish to establish a better tax system, which would build on pre-legislative scrutiny and the rewrite exercise for the benefit of all of us.

In conclusion, I have often asked Treasury Ministers for an explanation or economic, arithmetical or algebraic justification of the formulae used to support their position. In a world of increasing transparency, with greater pressures for freedom of information, the Treasury must re-examine the need for clearer statements on the economic effect of its measures and their justification; the way in which things have been calculated; and indeed the very oil of the system—details on tax revenue. I have asked for forward monthly projections from the Treasury, which are required for resource accounting and with which Departments illustrate their cash flows, but so far the Treasury has been reluctant to make that information available.

If our country's financial institutions are to map the progress of the economy, it is important that information on the cash flow of the British economy be made available to them on a regular basis. On the question of simplification, however, I hope that the Treasury is willing to be more sympathetic and call the type of meeting which I have suggested. 6.19 pm

Photo of John Redwood John Redwood Conservative, Wokingham

I have declared my interests in the Register of Members' Interests.

I, too, join my right hon. Friend Mr. Jack in paying tribute to those Opposition Members who have worked hard in Committee—I have read of their progress—and to my hon. Friend Mr. Flight who has done sterling work, as a result of which there have been improvements to the legislation.

I am glad that my hon. Friend is asking the official Opposition to vote against the Bill on Third Reading in principle. We have heard Labour Members explain that the Bill presents a series of tax measures that they say are necessary to fund our health service. If only it were so. But when I have sought promises from Health Ministers that the taxes in the Bill would lead to the provision of consultants, nurses, doctors and other personnel whom I need in my local hospital, I can get no guarantee. I have every fear that we shall not get them quickly or in the numbers that we need.

When I read in my papers and hear in the House from time to time of the massive losses being built up in the Post Office, the financial catastrophe that is Railtrack and the massive increase in budgets for the Government's burgeoning welfare bills, I see that this legislation is part of the Government's policy of tax and waste. It is the high taxation side to pay for large bills, many of them going on things that the public does not want, or just reflecting bad management.

I am not just voting against the Bill because I object to the whole strategy; I am also voting against it because some of the taxes embedded in the legislation are especially damaging.

Photo of Paul Farrelly Paul Farrelly Labour, Newcastle-under-Lyme

Will the right hon. Gentleman give the House the benefit of his wisdom in relation to the Conservative party's policy on funding the NHS, or would he admit that we still await that?

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

Order. I hope that the right hon. Gentleman will resist that invitation while we are debating the Third Reading of the Finance Bill.

Photo of John Redwood John Redwood Conservative, Wokingham

I am grateful, Mr. Deputy Speaker.

We need to spend money on sensible things and to raise taxes for that, but I believe that the Government are raising far too much and that a lot of it will not be well spent, which is what the public thinks.

The first tax in the legislation that I am worried about is stamp duty. Some amendments have been made, but the Bill does nothing for an area such as mine, with high and rapidly rising house prices, in which many people who are seeking to buy for the first time will be paying rather high levels of stamp duty compared with the modest sums that they have been able to save in their short careers so far.

That should matter to a Government who want more teachers, nurses and junior doctors, the very people who will have to pay those penal stamp duties when they are struggling to get together a deposit to buy their first flat or small house. In many parts of the country now where house prices are high and when the duties and thresholds incorporated in the legislation leave such people cruelly exposed, it makes it so much more difficult to populate the public sector with the good young talent that we need. Stamp duty is becoming one of the substantial barriers to their successful mobility and employment in places of high cost.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I have just spoken to my hon. Friend Mr. Burstow and he agrees with me. Is it right that one pays stamp duty on one's first house purchase? Does not one pay it when one sells?

Photo of John Redwood John Redwood Conservative, Wokingham

I have always had to pay it on purchase. I do not know where the hon. Gentleman has been, but it is a tax imposed when one buys a property. It is particularly hard for someone with a big student loan, who has tried to save for two or three years and put together a small deposit, to then discover that the biggest cost that they will have to face in addition to the legal bills and other necessary expenses will be stamp duty to a Chancellor belonging to a Government who say that they want such public sector workers to be able to work in expensive parts of the country as well as in cheaper parts, and then weep crocodile tears about the housing problems that they face.

The second tax that I wish to express concern about is the one highlighted by my hon. Friend the Member for Arundel and South Downs as his principal reason for opposing the legislation—that is, the taxation that is likely to be enacted for the oil industry. Here, again, one would hope that the Government would listen and learn from their own experiences if not from those of Governments in other parts of the world. Surely they can understand that the decision to impose a large one-off tax on the telecoms industry a few years ago was one of the main reasons for the precipitate collapse in investment expenditure and employment in that industry. What was once the proud growing industry that led the renaissance of the British economy in the 1990s is now a disaster area that is leading the economy down. We hope that that will not spread to every part of the economy, but it was a very big chunk of it to hit so heavily. Please will the Government understand the damage that will be done by taking that much money out of a high-investing industry? Will they recognise that their oil taxation, which is on a smaller scale and is therefore unlikely to do so much damage will, none the less, do some damage to the investment and employment prospects of that industry?

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

I intervene on a point of clarification. The right hon. Gentleman mentioned the one-off tax on telecoms. Was he referring to the auction of digital bandwidths? We must be very clear that an auction is not a taxation policy. The Opposition have made mistakes about that many times before. The process was freely and voluntarily entered into by the telecoms industry.

Photo of John Redwood John Redwood Conservative, Wokingham

It certainly was not. It was a tax on staying in business, because if the companies wished to stay in business, they had to buy a licence. The Government did not offer enough licences, of which they were the monopoly supplier, so the measure acted in exactly the same way as a tax and they were taking huge sums out of a very successful industry. Surely the hon. Gentleman can at least grasp the very simple point that if £22.5 billion is taken out of the pockets of companies that were going to invest a great deal, they will spend less and get into financial difficulties. Indeed, some of them went bankrupt or needed financial reconstruction.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

The right hon. Gentleman seems to be setting out a very curious scenario that does not at all accord with my recollection of history. Companies were bidding for licences, and the Government were selling a state asset—access to the airwaves—for a decent price, in contradistinction to what happened when his party was in office. In Italy, for example, where a similar process was undertaken, some of the telecommunications companies simply dropped out of the bidding or failed to bid, as some in the United Kingdom did. He is trying to blame the Government for the commercial decisions and mismanagement of telecoms companies in the United Kingdom.

Photo of John Redwood John Redwood Conservative, Wokingham

Labour Members protest too much. The policy was a tax and it did a lot of damage. I am warning the House and the Government that they are now imposing a less dramatic tax on the oil industry, but one that will have a proportionate effect on investment and jobs in the oil industry. The danger in the oil industry is that if even a marginal increase in taxation coincides with a lower oil price or some other worsening of the terms of trade of an oil company, it could lead to a very big cancellation of investment programmes.

The Government are therefore in a paradox. If they are lucky, the oil price will increase a lot, which will conceal the impact of their taxation, but have all sorts of other unpleasant consequences for the economy. If they are unlucky, the oil price will go down, which will magnify the impact of their tax increases and lead to the cancellation of projects or to a desire in the industry not to pursue marginal North sea projects that will be very damaging. A previous Labour Government found that out in the 1970s, so one wishes that the current Government had some folk memory of those experiences and had learned from them.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Does the right hon. Gentleman not accept that, by introducing a 100 per cent. first-year capital allowance, it is the Government who are taking the risk of lower oil prices and not the companies?

Photo of John Redwood John Redwood Conservative, Wokingham

One must consider the impact of all the oil tax measures that the Government are proposing, and not just the capital allowances. As the oil industry has made clear to the Government, the overall impact will be negative, and if circumstances deteriorate further on the demand or price side, further cancellations will result. I am surprised that the intelligent Minister cannot understand that.

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

My right hon. Friend might also be aware that large numbers of new participants in the North sea have not got any profits on which to use a capital allowance.

Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend makes a very valuable point. Of course, that is exactly what I had in mind when I was saying that if other conditions deteriorated further, more companies would find themselves in that position, which reinforces the fact that the overall balance of tax measures will be negative in the industry.

My third worry about the Bill is the measures that my hon. Friend the Member for Arundel and South Downs highlighted in relation to Jersey. I think that the offshore Crown dependencies that are part of the Great Britain island group have done an amazing job for their people and demonstrated that good honest businesses that generate many well-paid jobs can be run by keeping corporate and financial taxes low and keeping regulation within bounds. I regret that the Government are not standing up for that important set of principles and for the offshore islands within the European Union in the way that they should.

I fear that the measures in the Finance Bill are only part of a series of measures that are going to be taken gradually to make it more difficult for the offshore islands under the Crown to pursue their legitimate and decent businesses with the benefits of lower taxation and lighter regulation that are essential to their well-being. These islands are great success stories. They have little other natural advantage, but they have attracted talent and now have home-grown talent. They have good levels of employment and income as a result of concentrating primarily on financial services, and encouraging them through lower taxation and light regulation.

The Bill is another step in the wrong direction. It may not be the killer step, but it is part of a process in which the terms are going to deteriorate for the offshore islands. It may also spark more political opposition on the islands to their continuing relationship, in its current form, with the United Kingdom. That is something that I rather regret, and we ought to be very worried about it.

My fear about the Bill is that, when it targets specific areas or places for extra taxes without understanding the impact that it will have, it is too draconian. In other ways, however, it does not measure up to the growing storm clouds here and elsewhere in the world that might have benefited from a rather different response from a Government concerned about our future prosperity, the value of our savings, and our livelihoods.

The Government would be well advised to take the message of the United Kingdom stock market a little more seriously. It has now been falling solidly for two and a half years. It has been falling not just because of the world background, and it is certainly not just because a few big companies in the United States of America have made mistakes, or worse, in their accounting practices and undermined confidence recently on Wall street. It is falling partly because too much tax has been taken out of companies by the Government, and partly because the Government are moving towards greater hostility to the idea of making a profit on enterprise and being able to reinvest it.

The savings rate is too low, and our pension funds are in a state of crisis, as we debated recently in the House. The Finance Bill reaffirms the £5 billion a year tax hit on those very pension funds, which should be providing a better future for many of our constituents than they are now going to do, because of this continuing tax raid.

The Finance Bill is the product of a tax-raiding Chancellor who really believed that British business was so successful and so profitable that it did not matter what taxes he threw at it. I fear that we are going to discover that mistakes have been made in the Bill in its taxation of savings, its taxation of the housing market, its taxation of profits and, in particular, its taxation of the oil industry. Times are tough and different out there now. The Bill does not recognise that; it is part of the Government's policy of tax and waste, when we need a policy that promotes savings and enterprise.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health) 6:33 pm, 4th July 2002

This has been a wide ranging and fairly complex Finance Bill. As my right hon. Friend Mr. Jack mentioned, it is the first experience of a Finance Bill for my hon. Friends the Members for Cities of London and Westminster (Mr. Field) and for Fareham (Mr. Hoban) and me. I have been impressed by the good spirit that has existed both in Committee and in these debates today. Having listened to all the arguments, however, there are still a number of points on which I take great issue with the Government over what they are trying to do.

The issues relating to business taxation touched on by my right hon. Friend Mr. Redwood a moment ago are at the heart of my concerns. The debate about national insurance contributions has taken place under a different umbrella, but that is part of a complex range of issues relating to business taxation which reflects a careless approach to business by the Government. I do not think that they understand what they are doing. Nor do I think that they understand the implications of their actions for individual companies and for industrial sectors. Moreover, the Government are doing this at a time when it is only too clear that business is under pressure. I was flicking through the financial pages this morning, and thinking that, in recent years—probably since the late 1980s— I could not remember seeing quite such consistent bad news right across the corporate spectrum.

Precisely when the storm clouds seem to be gathering, the Government have chosen to put significant additional taxes on business. I fundamentally disagree with the comment made by Mr. Davey following my intervention. Whatever the rights and wrongs of the debate on the euro, they cannot be dealt with now, but the new taxation measures on business will affect business now, they will affect profitability this year, they will cost jobs, they will cost investment and they will make a cash difference to companies when they can ill afford it. The consequence of that—inevitably, in my view—will be seen in the employment market.

We have discussed extensively the Bill's impact on the North sea oil industry, which is probably the most acute example of the Government's failure to understand the consequences of what they are doing. The Government, in all their arguments on the North sea, remind me of a mugger who takes someone's wallet, but is kind enough to give him back the bus fare home.

The Government talk about the capital allowance that they are making available, but at Question Time a couple of weeks ago the Chancellor referred to the £500 million that he is levying from the industry. He cannot take £500 million out of an industry that employs 300,000 people and is a significant part of the employment base, not just in Scotland, but across the country, without affecting jobs and investment.

The Budget's cumulative tax measures will have an adverse effect on businesses beyond North sea oil. We have discussed the impact of the aggregates levy and the climate change levy. In Committee, we talked about the problems that the aggregates levy will pose in remote areas where such companies are often the principal local employer and a real driving force in the local economy, yet its continuing provision will remove funding from those companies and local communities and take it back to the metropolitan areas. That, inevitably, will affect communities in such areas.

There are, undoubtedly, good points for business in the Budget—no Government ever do everything badly—but equally there are fundamentally ill-thought-out measures. We have discussed the shortcomings of the mandatory e-filing proposals as well as the implication of the zero tax rate for small listed companies and the failure to extend that same benefit to unincorporated companies. Likewise, the measures to tackle the deductions to payments to subcontractors where there are undoubted anomalies go some way to solving the problems, but it is far from clear that they have dealt with all the difficulties that my constituents and others have raised with me.

The Bill also contains inconsistencies. We heard this afternoon and in Committee that the Government wish to raise duties on alcopops to tackle health and social issues, but they are also cutting duty on strong ciders, which we know are also a contributing factor to the problems that the Government are trying to address through the alcopops measures. There are vehicle excise duties adjustments for low-emission cars, yet, as I argued in Committee, the measures for vans do not reflect the changes in that marketplace.

My other big concern is key workers and the impact of the tax increases on the labour shortages in London and the south-east, to which my right hon. Friend the Member for Wokingham referred, as well as in other parts of the country that are affected by high housing costs and other high costs of living. We discussed the raised national insurance contributions during proceedings on the National Insurance Contributions Bill, but this Bill will enact a freeze in personal allowances, which will add another burden. That burden will be relatively small, but it will also be another straw on the camel's back for public service workers who find it increasingly difficult to live and work in the south-east.

As my right hon. Friend the Member for Wokingham said, the more the Government tax those people, the more difficulty they have buying a house under the stamp duty system. That will make it less likely that they stay and work in our high-cost areas and less likely that we will have good, effective public services in those areas. If that happens, we will undermine the very areas that deliver the tax revenues that support public services across the country.

I believe that the Finance Bill fails badly, and it comes from a Government who do not understand that if they put up taxes on an industry, it will cut jobs and invest less. The Government do not understand that if they increase the complexity of tax rules and tax regulations for small businesses and make their life more complicated, fewer people will take the trouble, invest the time and work the long hours that it takes to run a small business.

The Government do not understand that if they put up taxes for key workers, even in relatively small amounts, those people will not stay in the most expensive parts of our country. They will look to work elsewhere, and our labour and skill shortages as well as the absence of teachers, nurses and doctors will get worse.

This Budget, and this Finance Bill, fail to address problems that are manifesting themselves throughout our country. For that reason—along with many others that we have discussed in detail over the past couple of months—I shall be joining my colleagues and voting against Third Reading.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons) 6:40 pm, 4th July 2002

I share the experience of my hon. Friend Chris Grayling—this is my first Finance Bill. I thought it would be remiss of me not to participate in its closing stages.

I see a number of strands in the Bill. Let me say first that from time to time the Treasury has betrayed what could be described as a lack of understanding of the way in which businesses and people work. One example is the complexity of the relief for community and sports clubs, which have to jump through a number of hoops to claim it. Requiring treasurers of such small clubs to calculate how much expenditure is allowable and how much is not places a burden on them that I think will restrict take-up in many instances.

Mandatory e-filing has been mentioned. A few days ago it was reported that the Inland Revenue could not even allow its staff to use e-mail. How much confidence will small businesses have in their ability to transmit their tax returns to the Revenue electronically if at this stage the Revenue cannot even sort out its own e-mail system? It is legitimate for people to ask whether it is appropriate for them to deal with the Revenue when it has manifestly failed to provide services for its own staff.

In this and other debates, we have discussed the differential tax treatment of small businesses. It was interesting that the Paymaster General carefully used the word "company" rather than the word "business" this evening when welcoming the changes. In fact, many small businesses will lose out. I am not thinking just of sole traders; many other large unincorporated businesses and, in particular, partnerships will not be able to take advantage of the reliefs. Those that can will see a move towards incorporation, along with the costs involved in becoming a limited company—the costs of maintaining registers of shareholders, directors, mortgages and debentures, and of opening books for public inspection. The Government should consider changing the balance to remove the possibility of any deliberate or even implicit policy in favour of incorporation.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

The hon. Gentleman seems to be advancing a curious, if interesting, argument. If I have not understood it properly, perhaps he will correct me. He seems to be saying that if the costs of incorporation outweigh the tax breaks in the Bill, a small business will not incorporate. So what? The business will be where it is now. If the costs of incorporation are less than the tax breaks, it will incorporate. Again, so what? It will still be ahead of the game.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

What we do not want to do is impose unnecessary regulatory burdens on small businesses. Yes, there will be a financial incentive if the tax benefits of incorporation exceed the costs, but do we really want to impose those costs? We do not want to place an ongoing burden on small businesses; we want those businesses to focus on building themselves up, rather than complying with rules and regulations dreamt up to keep them occupied.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I am loth to give way to the hon. Gentleman again, but as he asks such penetrating questions I will do so.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Would the hon. Gentleman prefer the tax breaks not to be there at all? That seems to be the thrust of his argument.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

It manifestly is not the thrust of my argument. I would like a level playing field for businesses, be they incorporated or unincorporated. They should not be forced to choose one legal form or another simply to benefit from tax breaks. The Government have shown a lack of understanding of how business operates and how people run their personal affairs.

We have also seen the benefits of consultation, and the way in which certain aspects of the Bill have been discussed with representative bodies has been very valuable and has cut down the amount of time that we needed to spend discussing them in Committee. It is interesting to note, however, that the area of greatest disagreement has been the one on which there has been no consultation—oil taxation. The Government need to learn the lesson that consultation makes for a better Finance Bill—one that gains the acceptance of the community for which it is trying to create a suitable tax regime. The oil industry has been in uproar because the Government failed to consult it.

This is a long and complex Finance Bill. My right hon. Friend Mr. Jack was right—we need simpler tax legislation to reduce the burden of compliance on business and its advisers and to make it far easier for people throughout the country to understand their own tax affairs, without recourse to expensive legal and tax advice.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 6:46 pm, 4th July 2002

As with many Finance Bills, I suspect that this one will be remembered as being good for lawyers and tax accountants. They, perhaps alone, will admire the increasing complexity introduced by a somewhat meddlesome Treasury team.

My hon. Friend Mr. Flight spoke skilfully about many matters throughout our proceedings. As he said, we find the oil and gas provisions and the straitjacket imposed on the Channel Islands and other Crown dependencies especially objectionable, and that is why we will vote against Third Reading.

Even the Government's own advisers now highlight the fact that the Chancellor's growth projections are likely to prove grossly optimistic. Projections made only a matter of weeks ago now look hopelessly out of date. We are expecting to have growth of 2.25 per cent. in the current year, rising to 3.25 to 3.5 per cent. in the next financial year. On that basis alone, we have had vast acceleration in public expenditure. A Government who promised the end of boom and bust have placed their foot firmly on the spending pedal at just the wrong time in the business cycle.

Spending on health is rising, not just for the next five years as shown in the Budget, but presumably at similar rates for the period beyond 2006–07. It seems that it will largely be business that continues to be milked. Many of us have spoken in past years about the Government's redistributive agenda, which may have seemed out of keeping with a generally fairly successful economy, but we had an interesting discussion on property and capital taxes in what seemed a fairly innocent debate on clause 115 and, as my hon. Friend Chris Grayling said, it seems that the Government regard London and the south-east as fair game for a higher burden of tax, be it inheritance tax, a vast increase in stamp duty or a whole array of other corporation and income taxes; yet there is little evidence of the investment in the public sector to which the Paymaster General refers as being focused on that area.

As the Member of Parliament for Cities of London and Westminster, I have been the first to give credit where credit is due. To a large extent, in their first five years the Labour Government have been able to be true to their watchword of stability in the economy. They have gained many plaudits for that from the business community, of which I was a member before 7 June last year. Many business people admired what the Government had done, especially when we take into account the fears that existed before May 1997. However—there is always a "however" on the Opposition Benches—although the Treasury has played the hand that it inherited in 1997 skilfully, it is fair to say that it was a very good hand. That fact has, perhaps, not been recognised as readily as Opposition Members hoped.

In keeping with the comments of my right hon. Friend Mr. Redwood, I am concerned about the sense of denial and complacency in much of what the Treasury—and the Government as a whole—say about the future of the economy. For the good of the economy and the country, I hope that I am wrong, but I suspect that when we gather next year to consider another Budget and another Finance Bill—I fear that the wish of Mr. Davey for a biannual Finance Bill will not come true for some years to come—the economic climate will be very different. By then, we will see the damage to business of much of the meddling to which we have referred.

I wish Treasury Ministers the very best, because it is in the interests of this country that we have a strong economy—not least in respect of the investment in the public and private sectors that we all want to see. However, difficult times lie ahead. We have put prudence to one side, and the foot is firmly on the public expenditure pedal at what is probably entirely the wrong time.

I shall be interested to hear what the Financial Secretary has to say. I thank her and her ministerial colleagues for providing a constructive basis for our discussions in Committee, on Report and on Third Reading. However, I shall join my hon. Friends—notably my hon. Friend the Member for Arundel and South Downs—in voting against granting the Bill a Third Reading, because some serious problems lie ahead.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 6:52 pm, 4th July 2002

I welcome this opportunity to bring the debate on Third Reading of the Finance Bill to a close. This, too, was my first Finance Bill, and I have enjoyed it very much. I want to begin by thanking my hon. Friends and other hon. Members, the special interest groups and others who took a great interest in the Standing Committee's proceedings. Their close attention to detail and their unflagging enthusiasm have done much to smooth the Bill's passage. We certainly heard some interesting speeches—from both sides of the House—today and in Committee.

Government is all about choices, and the Finance Bill is no exception. We have chosen in favour of economic growth and prosperity; in favour of enterprise and innovation; in favour of a sustainable future. Liberal Democrats and Mr. Flight have accused the Government of being Panglossian—of putting too rosy a glow on our economic success. I am the first to admit that there is great uncertainty about the world economic outlook, but the fact is that the macro-economic framework that we have put in place is the right one.

On coming to power in 1997, we gave the Bank of England independence, and an independent Monetary Policy Committee is delivering pro-growth low inflation. It has the right symmetrical inflation target to deliver the dual objectives of growth and low inflation. We also have a tough fiscal framework. Over the next five years, net debt will rise no higher than 31 per cent., according to the figures in the Red Book. We now have the most open and transparent fiscal framework that I know of in any of the major G8 countries. The evidence of the success of that framework is clear. Long-term interest rates are at their lowest level for 40 years. We have had the longest period of sustained low inflation since the 1960s. Employment has risen by 1.5 million since 1997, and in the past year we have enjoyed the strongest growth of any of the seven largest industrialised economies

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

If the right hon. Gentleman will allow me, I shall make a little progress.

Mr. Davey highlighted the prospects for manufacturing. Of course, I acknowledge that world trade growth was near zero in 2001—down from 12 per cent. in 2000. It was inevitable that UK manufacturing would be hit when world trade growth collapsed, and that the internationally exposed sectors of the UK would be affected. Manufacturing output fell in all industrialised nations, but by less in the UK than in our major competitors. For example, manufacturing output in Japan fell by 13.75 per cent. last year—more than twice the fall in this country.

The first signs of tentative recovery in the manufacturing sector are appearing. The Red Book forecasts that output will gradually pick up in the second half of the year. The answer is not artificially to massage down the exchange rate, as the Liberal Democrats proposed. That has been tried in the past, and it does not work. It leads only to higher inflation, and boom and bust.

Photo of John Redwood John Redwood Conservative, Wokingham

If everything is so stable and well run, why have we had boom and bust in the stock market and in the telecom and high-tech industries over the past five years?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

It is clear that stock markets across the industrialised world have fallen, or does the right hon. Gentleman believe that the UK stock market has been especially badly affected? The causes have been the uncertainty of the world economic climate and the vulnerability of corporate profitability which, as the hon. Member for Arundel and South Downs pointed out, has resulted from the recent Enron and WorldCom events.

I turn now to some of the issues raised in the debate. The hon. Member for Arundel and South Downs claimed that the Budget was somehow bad for business. It is not; it is good for business. It promotes enterprise, growth and productivity.

The Government have introduced measures to extend the research and development tax credit to all companies. The Budget cuts the small companies rate of tax by 1p and, by means of a 10p cut, reduces the starting rate to zero. We have introduced measures to reduce the administrative burden of VAT for small companies, and to improve their cash flow. We have also introduced the community investment tax credit. The Budget will increase enterprise and promote entrepreneurship in the UK economy.

The other major point raised in the debate concerns the North sea oil regime. It is right in principle to tax a scarce resource produced under Government licence. Every oil-exporting country has a special tax regime for that purpose. The Government are clear about our principles—to raise a fair share of revenue for the country, and to promote investment.

That is what we have done with the 10 per cent. supplementary charge on oil, and with the 100 per cent. capital allowance. The reform is right in principle, and we now have a stable oil taxation regime for the future.

Opposition Members have criticised the Bill for its complexity, even though 152 of its pages introduced tax relief, 160 simplified the tax system and more than 200 pages were repealed.

I know that Mr. Jack has a great interest in simplification. He has demonstrated a long-standing interest in the tax rewrite project, and I was privileged to serve on the consultative committee before I became a Minister. However, he suggested that the Bill has not been scrutinised thoroughly. In fact, the Government have involved just those representative bodies that the right hon. Gentleman suggested in the extensive consultation that has been carried out on the measures.

The Bill means that the UK will remain a stable, low-tax environment, favourable to business, enterprise and innovation. The overall tax burden is lower than the EU average, and lower than each of our main EU competitors. The atmosphere and climate in the UK are right for economic growth.

The Bill supports innovation and entrepreneurs. It releases productive potential as it promotes sustainable development. It joins the hands of business and communities in the cause of regeneration.

Innovation, enterprise and regeneration: those are the Government's ambitions, for the Bill and for Britain. I believe that we are achieving them, and I commend the Bill to the House.

Question put, That the Bill be read the Third time:—

The House divided: Ayes 277, Noes 109.

Division number 296 Orders of the Day — Finance Bill — [2nd Allotted Day] — Schedule 37 — Aggregates levy amendments

Aye: 277 MPs

No: 109 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly agreed to.

Bill read the Third time, and passed.