This is the last day of the debate on the Budget proposed last week by my right hon. Friend the Chancellor. I want to focus on the Budget as it affects business in this country, because we live in a time of massive and rapid economic change that will affect each and every one of us as individuals, and which brings new challenges for British businesses and for our economy. This budget will help us to meet those challenges. It encourages investment to build Britain's long-term future. There are measures to help us deal with the consequences of the economic changes to the world climate, as well as measures to increase prosperity.
The Chancellor was able to achieve that against a background of a strong and stable economy, which is enjoying the longest period of stability on record. We expect the economy to grow with historically low mortgage and interest rates—just half those of the 1980s and 1990s. If we are to compete in the new global economy, we need to invest. We need to invest in transport and other infrastructure, and in education and skills and science, and we must also ensure that we have a flexible and highly skilled work force.
For businesses, we need to create the right environment to encourage innovation and a tax structure that encourages investment and research and development. Ten years ago, we had the lowest level of investment of the G7 countries, but now, alongside North America, we have the G7's fastest growing business investment. It has risen in real terms by 48 per cent. since 1997. In the last quarter of 2006, total business investment rose by 4.5 per cent. and manufacturing investment by 3 per cent. Compared with 2005, total business investment rose by 13.5 per cent. and exports of goods and services are also up.
Britain is seen as a good place to do business. We are well placed in respect of ease of doing business. We also have a worldwide reputation in many areas, such as pharmaceuticals; almost 20 per cent. of prescription medicines are developed in the United Kingdom. It is not only the new industries that are doing well; established industries are doing well, too. The automotive industry has had its problems, but it produced more than 1.5 million vehicles last year, almost reaching the number of vehicles that were produced in the 1970s, which is regarded as the heyday of British car, van and lorry manufacturing. There is a new model of Mini, and Nissan has the most productive plant in Europe. There are many other examples that show that the British car industry is doing well. The names might be different from those of 30 years ago, but the success is noteworthy.
The aerospace industry has a turnover of £22 billion, and the Department of Trade and Industry supports research and development— £153 million in the last year. There has also been success in that industry. I hope that, with the award of new work on carbon technology in relation to Airbus, there will continue to be developments in that sector.
In new hi-tech sectors, the UK environmental industries are growing at 10 per cent. a year, providing a total of 100,000 jobs in the next 10 years, and our bioscience industry is the second biggest in the world after that in the US. British industry is doing well in those sectors, as it is in nanoscience and nanotechnology research, where our academic standing is world class. That needs to be converted into commercial success, as those are the areas in which we will have to compete in the future.
The Secretary of State is giving us a list describing the golden uplands of Labour economic management, but will he explain why there has been a decrease in the number of people employed in manufacturing since Labour came to power? In the past four years of the Conservative Government, 200,000 more people were employed in manufacturing, so there has been a collapse under this Government.
The hon. Gentleman carefully picked a few years of the 18 years that the Conservatives were in power, because of course if he had cared to look across the entire 18 years he would have seen that there were substantial job losses in manufacturing. It is the case that, for a long time now, structural changes have been taking place in our economy, and that has been happening in other economies as well. There has been a move away from manufacturing towards the service industry. For example, our financial services industry is indisputably a world leader, and it has grown massively since the 1980s.
However, manufacturing still represents about 14 per cent. of our gross domestic product, and I gave some examples of where we are doing very well. We have a good story to tell in engineering generally, and in aerospace, the automotive industry and other areas there is good-quality employment. I mentioned that manufacturing output was also up.
I think that Members in all parts of the House acknowledge that there have been substantial structural changes in our economy. That should not unduly worry us. It is important that we have a balance—that there is a mix. Manufacturing is very important: to coin a phrase, manufacturing matters. However, it is also important that we are able to exploit our service industries, which do well in various parts of the world. When I visit countries such as China and India, people recognise that we have something in the City of London and our financial services industry that other parts of the world do not have. So manufacturing does matter, but what is also important is the strength of the economy overall. On any view, what we see today bears comparison with what we saw in 1993, or in 1983, for that matter.
There are new jobs in the public sector. Indeed, it is a matter of some pride that there are more teachers, doctors and nurses—that makes a difference. Such spending has not been supported by the Conservatives these past 10 years, although they do give the impression at every Prime Minister's Question Time that they would like even more spending on health and education, for example. Other sectors, such as the financial services industry, have expanded dramatically in the past 10 years, and not just in London but in other centres such as Leeds and Edinburgh, part of which I represent.
Given the Secretary of State's experience with the Pilot taskforce, he will know that a lot of manufacturing investment comes from the North sea oil and gas industry, and that many manufacturing employers in my constituency support that industry. Is it not therefore vital—not only for those jobs but for the long-term income of the Treasury—that we have a tax regime that does not frighten off investors, and which maximises the long-term attractiveness of the North sea, so that we can maximise the gain in terms of our energy and employment needs?
I agree with the hon. Gentleman and, as he knows, I am making a point of chairing the six-monthly meetings with the oil supply industry because it is very important that we have a regime that encourages investment. Two interesting things are happening in the North sea. Some of the forecasts of those who said that the tax changes that we announced at the end of 2005 would be bad for the industry were not borne out. Investment is up, and a very healthy list of people are applying for the last round of licences to explore. We are also working closely with the industry in examining the possibility of extracting oil west of Shetland, where the waters present extreme difficulties, as the hon. Gentleman knows; however, there is a lot of oil there.
When we announced the changes to which I referred, we said that the North sea oil taxation regime would remain for the rest of this Parliament. The industry asked us about that as recently as last November, and when I met Pilot, it said that, whatever else happened, it wanted a stable regime. I appreciate that, as of last week, one or two people appear to have decided that that is not what they meant when they said they wanted the regime to stay the same. We recognise the importance of North sea oil, and allowances in that industry are different from the rest of the corporation tax regime, but I believe that the North sea regime is stable and right.
What is worrying is that the revenues from North sea oil are down dramatically; indeed, they will be down about £4 billion, on average, over the next few years. For the Scottish National party, which has predicated so much on North sea oil, that is extremely worrying. A lot of the money that it has already "spent" simply will not be there.
I thank the Secretary of State for giving way again. Does he recognise that a lot of that extra investment came about because of a very high oil price throughout the world? The gas price is now dropping, which is obviously benefiting users. However, when oil is extracted, gas is often extracted at the same time, so the North sea price is effectively dropping. The Chancellor made it clear that the original tax increase was predicated on the very high prices around the world. Given that gas prices are falling, costs are rising dramatically and fields are getting smaller—moreover, the projected forward investment from the industry appears lower—the Government have to be careful not to kill the goose that lays the golden egg.
The current North sea oil price is not so very different from 12 months ago. We have made it clear over the past 10 years that we would of course look at the North sea oil tax regime. It is thought that there might be only 30 years-worth of oil and gas left in the North sea, but in order to maintain security of supply in this country it is in our interests that we do everything that we possibly can to continue to extract oil and gas. Last week's announcement is not going to change but, through the hon. Gentleman, the industry will doubtless want to look at the response document that the Treasury published on the same day, and which examined the very issues that he has set out.
The North sea oil and gas industry has existed for the past 36 years and, as I have said, we will do everything that we can to encourage it, but it is also important to look to the future, which is why we have doubled the science and technology budget since 1997. Indeed, more than half the Department of Trade and Industry's budget now goes towards science and technology. Last week's Budget provided a further rise in science spending—from £3.4 billion this year to £4.9 billion by 2010-11. That is in addition to more spending for the Department for Education and Skills, particularly on universities.
We have a worldwide reputation for being good at science. We have 1 per cent. of the world's population, but 5 per cent. of its science and some 12 per cent. of scientific citations. In the past few years, we have spent more than £3 billion building world-class laboratories, and anyone who visits universities throughout the country will see the result. Ten years ago, many scientists were working in buildings on which money had not been spent for years; now, across the country we increasingly see modern, up-to-date laboratories. Patents are up 98 per cent., and income from intellectual property is up by more than 100 per cent. In the past three years, 25 companies have emerged from universities and have floated on the stock exchange; they have been valued at £1.5 billion. University spending and research on fuel cells and nanotechnology, and in the biomedical field, also show how such spending and research can be turned into commercial opportunity.
Last week, I announced a £100 million competition to bring universities and business together to lead in high-tech innovation—from medical research to environmental transport—in order to convert that scientific breakthrough into commercial success. We already fund more than 600 projects with over £430 million of Government funding. Research and development as well as innovation are keeping the UK at the cutting edge of international competition. R and D tax credits, which I understand the Conservatives now oppose, have delivered nearly £1.8 billion in support for business and have made a real difference. Large companies such as Nissan have used them to support investment in design, and smaller companies such as Wolfson Microelectronics—an Edinburgh university spin-out company that developed the technology at the heart of iPods—have used them to continue to grow and to innovate in their business. The Budget increased the amount of R and D tax credits available, and in total about 4,500 small and medium-sized companies are claiming more than £250 million a year in tax credits. Those credits are absolutely essential if we are to support the investment that will enable us to compete in the future. It is no wonder that we have attracted more R and D projects than any other country in the European Union.
It is also important that we continue to invest in education and skills, which the House debated last week. Education spending has doubled since 1997. Then, funding per pupil was £2,500, but it will rise to £6,600 by 2010. It is providing us with better equipment, modern schools, more teachers and more spending on universities.
Britain must also remain a competitive place to do business. In the Budget, we announced reforms to employment law that simplify procedures and cut the cost of workplace disputes. We are very conscious of the need further to reduce burdens on business. Because of the strength of Britain's economy, the Chancellor was able to cut corporation tax again, to 28p, and it is lower than that of all our major competitors. We also believe that investment decisions should be driven by commercial, not tax, considerations. Of course, the reduction in the basic rate of income tax helps not just individuals but many small businesses. Up to 3.4 million sole traders will benefit from personal tax reforms and allowances. They will also benefit from the new annual investment allowances of up to £50,000. Those allowances show that we recognise the need to encourage that investment, as well as research and development into new products.
Does the Secretary of State recognise that, as the Federation of Small Businesses has shown, the vast majority of female entrepreneurs find that, as start-ups, they are in the £5,000 to £18,000 tax bracket—the very bracket that is going to lose out? In what possible way does that encourage more female entrepreneurs?
It is worth bearing it in mind that of the just over 4 million small businesses in this country, about 3.4 million are sole traders and are therefore taxed through the income tax system. Because of small business rate allowances such as the annual investment allowance, which is quite generous—many forms of business spending that people might typically contemplate are deductible—if a business invests, say, just over £2,300 in additional investment, the amount of tax that it has to pay is reduced. The regime that we are putting in place helps small businesses and individuals who benefit from the lower rate of income tax and the annual allowance. The research and development credits that are available will also help businesses do more. It must be right that we focus our tax allowances on the behaviour that we want to encourage, and we want businesses to do more research and development and to reinvest and grow, because that is how they will flourish. Our regime is and will be beneficial for small businesses and I believe that we will see that sector grow.
The annual investment allowance changes mean that unless one invests £50,000, one receives no benefit. Therefore, the change in corporation tax will mean a lot of losers among small companies. Does the Secretary of State agree with Robert Peston, the BBC commentator, who has looked at the issue in some detail and shown that the vast majority of service businesses will be automatically excluded because they do not make the capital investments that the Government are trying to support?
I have not studied Mr. Peston's reports, or heard them recently, but I will take the trouble to do so when I have the time. It is not the case that a company would have to invest £50,000 before it saw any gain. As I have just been explaining, a medium company that might be faced with a £500 increase in tax would need to invest only £2,300 more to offset it. In other words, they would not pay more tax. There are many companies and sole traders who, if they use the research and development tax credits, will pay less than they do at present.
The objective of the reforms of corporation tax and business taxation is to reduce the rate and to target the allowances in a way that encourages investment and research and development. I am sure that the hon. Gentleman would agree—although perhaps not in public—that some of the allowances that are claimable today were put in place after the second world war when entirely different objectives were important, such as reconstruction, for obvious reasons. It must be right that the Government take the opportunity in the 21st century to ask what is appropriate to encourage investment. Our future depends on our being able to encourage businesses to invest, especially in research and development, on which we have a good record. The Budget will encourage further investment. From a position of economic strength, we have been able to increase investment in science and in education as well as other public spending. We have been able to do more to help businesses invest in the future, as well as making sure that the tax system rewards work and at the same time helps families with children.
I can also tell the House that we will continue with our reforms of the labour market, which will help parents to work more flexibly and balance their time at work and time with their families. This weekend sees further rights to request flexible working, which will be extended to more than 2 million carers, and that builds on our other reforms. On that issue, as on so many others, the Opposition are pointing in two separate directions. A few months ago, the Leader of the Opposition said that he wanted more flexible working. He presented himself as the thoroughly modern man. However, in today's Financial Times he has briefed that he does not want to see any extension to flexible working. He has gone back to the position that we would expect from the Tories.
It is not just on family-friendly policies that the Tories are saying different things. On climate change, as my hon. Friend the Economic Secretary pointed out in last night's debate, the Opposition are saying one thing and doing another. On energy, where we have to meet the twin challenges of security of supply and climate change, the Tories are against the climate change levy, but in favour of a tax on holidays. They would tax individuals who fly, but allow businesses to claim back that tax. They say that they are in favour of renewable energy, but up and down the country Tory councils are opposing the biggest single source of renewable energy—wind farms or "bird blenders", as the Leader of the Opposition calls them. They are also opposed to the renewables obligation. In contrast, this Budget has a range of measures that help tackle climate change, as the House debated yesterday. If it is successful, carbon capture and storage will present us with an opportunity not just to reduce the amount of carbon we produce, but to export that technology across the world.
If we are to continue to remain competitive in the face of the investment being made by China, India and other developing countries, we must also recognise the key role that public expenditure plays in, for example, schools and universities. Perhaps today, the last day of the Budget debate, the Opposition will finally tell us whether they will match our spending plans. Public expenditure, which is £552 billion this year, will rise to £674 billion at the end of the spending review period. That is investment in schools, hospitals, law and order and support for business. Are they prepared to match that spending? Why cannot they tell us?
The problem for the Opposition is that they are trying to convince one audience that they really want to cut spending and taxes, and another that they want to spend more on public services. I feel sorry for the shadow Chancellor and shadow Chief Secretary, because hardly a day goes by when the Tories are not promising to spend more money on extra prison places, more housing, and a new border police force. At the same time, they have already promised to cut another 1p off corporation tax. They also have a commitment to abolish stamp duty at a cost of £4 billion, as well as to introduce a transferable married couple's allowance that would help only 1 million of the 12 million married couples.
The Tories have massive spending commitments, but they want to promise tax cuts. That is why they have their third fiscal rule, which attempts to square a circle, but that cannot be done. The rule would have meant £21 billion less spending this year alone. That third rule is a rigid, inflexible approach that takes no account of what the economy needs. It would not have allowed the investment that we have made in public services over the past seven years. The Leader of the Opposition said that his policy would make a "dramatic difference". Indeed it would: he would have spent substantially less at the very time that our economy needed that spending over the past 10 years. It is that incoherence that led to the massive economic problems of the last Tory Government in the early 1990s, in which the Leader of the Opposition played such a central and pivotal role as a key adviser.
We have struck the right balance between borrowing, tax and spending. We have made investment to build public services, and provided incentives to invest and a tax system that is fair. This is a Budget for investment for the environment, and one that will equip this country to meet the challenges that it faces. I commend it to the House.
I begin by offering the apologies of my hon. Friend Alan Duncan. He has a long-standing engagement of some 50 years: I will leave the House to work that one out.
Last week, the Chancellor gave us his view of the state of the economy. His speech, however, was as notable for what he left out, as for what he actually said. The Chancellor did not, for example, tell us that productivity growth—the measure that he once called the fundamental yardstick of economic performance—is now barely half the rate that it was under the last Conservative Government. He did not mention that business investment, a key driver of future economic growth, has now fallen below 10 per cent. of GDP for the first time since records began. He also neglected to mention that while Britain had a balance of trade surplus in May 1997, under his stewardship there has been a trade deficit every month since January 1998, with last year's deficit being an all-time record of more than £54 billion. The sleight of hand did not end there. While the Chancellor was proud to boast that his borrowing forecast was £1 billion better than in his pre-Budget report, he forgot to mention that it was still £16 billion worse than he predicted in last year's Budget.
So the Chancellor's speech—unlike that of the Secretary of State, to be fair—was a triumph of omission over candour. But perhaps the most interesting omission was on the UK's declining competitiveness. The World Economic Forum is the leading independent authority which assesses international competitiveness. It has found that in recent years the UK has fallen further and further behind. For example, when it comes to starting up a business, the UK now ranks 22nd in the world, behind Latvia and Tunisia. When it comes to the burden of the tax system, we are now down at No. 25, below India and Nigeria. When it comes to the burden of regulation, the UK is now ranked a dismal 41st, below Azerbaijan and Burkina Faso. The result is that while the Chancellor has been in office, the UK has fallen from being the world's fourth most competitive nation to being the 10th. I wonder why that was not in his speech?
The Opposition do not pretend that everything is wrong with the economy, but it would be nice if Treasury Ministers—and they are well represented here this evening—for once could be a little more candid about the underlying problems that our economy is facing, and about the tax burden that they are imposing.
It is clear that the British people see the Budget for what it is—a tax con, and not a tax cut. It is a con that hits the poorest hardest. Thus a full-time employee on the minimum wage will pay more than £160 more in tax as a result of the Budget. The Chancellor says that people can claim the money back through higher tax credits, but he knows full well that take-up rates for tax credits are often only 60 per cent. It is not even a Budget that takes money with one hand and gives it back with the other: it is one that takes people's money and then gives them a form to fill in instead.
Of course, the tax con was not limited to personal taxes. For more than a week, the Treasury was leaking that it was to be a Budget for business. However, page 208 of the Red Book shows that the total taxes on business are to rise by more than £1 billion next year and another £800 million the year after.
I welcome the fact that the Government have taken our advice in respect of large companies and are going to simplify reliefs to cut the headline rate. However, although the Chancellor claimed to be tackling tax complexity, he does not seem to realise that he is part of the problem. In 1997, Tolleys yellow tax handbook was 4,550 pages long; in just nine years, it doubled in size to more than 9,000 pages—not least as a result of more than 100 stealth tax changes.
Last year's Finance Bill was a bit of a dull affair, comprising a mere 181 clauses over 489 pages, and so complex that it needed three separate volumes of explanatory notes. That represented a quiet day in the Treasury office. When he replies to the debate, perhaps the Chief Secretary can tell us how many pages long Tolleys tax guide will be after this year's Budget.
For business, every change that the Government make costs time and money in compliance. Indeed, the Federation of Small Businesses says that simply complying with Government red tape now costs every small business in this country seven hours a week. It is no wonder that our productivity is so poor.
Business and investors need clarity and certainty, but from this Chancellor they get only confusion and complexity. Never mind Stalin, the Chancellor's constant tax changes are more Maoist in character—a form of permanent revolution in regulation.
As was briefly mentioned in the Budget, a vital part of the Department of Trade and Industry's remit is supporting business, especially small business, yet all too often Ministers have no idea whether the programmes that they are running have any effect. Earlier this month, we published the interim report from our small business task force, which is chaired by the entrepreneur Doug Richard. It found that, overall, the Government spend £12 billion of taxpayers' money on small businesses, but cannot—or will not—say whether the money is working.
Part of the problem is that the whole system has got out of control. There are roughly 3,000 schemes, and they are run by approximately 2,000 different public bodies and their contractors. Just as worrying is the fact that, in most schemes, much of the money is lost in administration. Indeed, the task force found that, even in the best schemes, a third of the money in such schemes is lost in administration.
Not surprisingly, business confidence in state advisory services is low. The FSB has found that just 4.4 per cent. of small businesses use Government-funded advice, with more than half consulting accountants. Moreover, those small businesses that use public services are often deeply disappointed. The task force found that less than 0.5 per cent. of all small businesses using state agencies for advice were satisfied with the advice provided.
Given the amount of taxpayers' money involved, it is extraordinary—although, sadly, not surprising—that the Government can spend so much and have so little to show for it. Small businesses deserve better.
It is these small businesses that are the real losers in this Budget. As a result of the changes announced by the Chancellor, small companies face an extra £820 million tax bill from the Treasury. The Budget increases the rate of tax that small companies pay by 3 pence in the pound, and creates a new set of complex capital reliefs. The Chancellor knows all too well that many small companies will not be eligible for those reliefs, or will not apply for them.
Thus most service businesses—such as design agencies, hairdressers, shops or accountants—will be losers. Those companies innovating through contracting-out will also lose out, and even those business that do invest will still be losers under this Budget.
As Nick Goulding, chief executive of the Forum of Private Business, said:
"The Chancellor has used smoke and mirrors to disguise the fact that there is nothing in this budget to support small businesses".
That is why we will be voting against the Chancellor's small business tax rises later tonight. They are bad for small companies and bad for the economy.
Last Wednesday, the Chancellor had a golden opportunity to match his enterprising rhetoric with practical action to help business. He could have set out a balanced view of the strengths and weaknesses in the economy, and explained the long-term threats and opportunities. He should have helped small businesses as he helped large firms, but instead he pretended that the Budget was both tax-neutral and a tax cut. Instead of simplifying the tax system for all businesses, he made it worse for the smallest. Instead of an income tax cut, we had a tax con.
Beyond the spin and smoke and mirrors, people can now see what kind of Chancellor this really is: a man whose tax promises cannot be trusted. If he becomes Prime Minister, they will not forget it, nor will they forgive him.
I am pleased to follow the Opposition spokesman in this debate. I am delighted that there is such a strong turnout from the Treasury team, even though this evening is dedicated to the DTI aspect of the Budget. The Economic, Financial and Chief Secretaries to the Treasury are all here, as is the Paymaster General—all are in their places.
One of the least satisfactory aspects of the Budget debate, here and elsewhere, has been the unpleasant and unnecessary personal attacks on the Chancellor. Mr. Prisk, who has just spoken, repeated some of them. Anyone taking an objective view over the past 15 years would say that someone who could be Labour's shadow Chancellor for five years in the build-up to Government, and then perform as my right hon. Friend has in the role of Chancellor for 10 years, yet remain fundamentally sane— [ Interruption. ] I do not think Opposition Members question my right hon. Friend's sanity, but his is no small achievement.
As I look at the Chancellor's record, it seems to me that he has emerged with a remarkable combination of outcomes. He is feared by the Opposition, he has emerged as the envy of some of his peers, and he is still held in deep affection by his friends. Finally, throughout the country, he enjoys general respect, if nothing more.
In a moment. By any standards, that is a remarkable set of outcomes. Any sensible Member of this House—and there may not be many on the Opposition Benches—would be happy to plead guilty to them. In fact, my right hon. Friend's remarkable record goes further. If I am to believe what I read in the press and elsewhere, he is poised to emerge as primus inter pares of us all.
I will in a moment, if the hon. Gentleman keeps quiet.
That is something that none of us would be ashamed of, nor should we be.
However, I have bone to pick with the Chancellor and the Treasury Front Bench about the removal of the 10 per cent. basic rate. I cannot believe that that is the last word from my right hon. and hon. Friends on the subject. It is hurting many people whom the Government never set out in any of their policies to hurt—I accept that that is a consequence and not an intention of the Budget. Indeed, when the 10p rate was introduced it was precisely to alleviate those problems that, in part, we are now creating. I know that there are tax benefits and that there are many other things that we have done for that category of taxpayer, but the matter should be revisited, and I hope that we will do so before the next Budget. Having made my point, I shall leave it at that. I wish to make one more point, as I see that Peter Luff is not quite as keen to intervene as he was.
I strongly agree with what the hon. Gentleman has been saying, and I welcome his comments. In response to his point about the Chancellor winning the heart and soul of the British nation did he, like me, watch a live opinion poll on "Sky News" during the Chancellor's interview on that programme? It remained resolutely negative throughout the entire interview, except for one fleeting moment—and here I shall give the hon. Gentleman an opportunity to pay tribute to the Chancellor—when the right hon. Gentleman boasted about not joining the euro. I pay tribute to the Chancellor for that important non-decision.
May I tell the hon. Gentleman that the one thing to which he drew attention—staying out of the euro, despite many pressures—was a unique achievement by the Government? I can think of one or two Ministers who are in the Chamber who were influential in that vital decision. Let us leave it at that.
I said that the Chancellor is respected throughout the country, and I can assure Opposition Members, much to their disappointment, that we will not let our policies or decisions be affected by short-term fluctuations in opinion polls. Those who look at those short-term fluctuations —[ Interruption. ] Yes, exactly, they will mislead themselves, and indeed, Opposition Members are in danger of doing so at the moment. We will stick, as we have done, with policies committed to long-term stability, which is a remarkable achievement, and to the long-term growth and prosperity of the economy.
I wish to put one more point about the specifics of the Budget to Ministers for consideration. I understand all the reasons why we have taken the step, which again corrects something that we did earlier, of increasing the tax rate for small companies. I am aware of capital allowances, the research and development allowances and the other measures that have been taken, which are potentially of considerable benefit to the small business sector. Of course, as my right hon. Friend the Secretary of State for Trade and Industry clearly said, roughly 3.5 million of the 4 million small companies in the UK are sole traders, so they are not affected by the measure, but there is still a substantial group of companies that are affected. We should not undertake one of those big, complicated bureaucratic reviews, but we should take a clear-headed sharp look at how we spend the money in support of small companies.
In fairness to the hon. Gentleman, he made that point earlier. He made one or two sensible points among others that were party political, and I take them absolutely in the spirit in which they were made. [ Interruption. ] Shameful, indeed.
I want to finish with those two points, and say something to the Treasury in whatever new shape it emerges. I would like tell my right hon. Friend the Secretary of State for Trade and Industry, who has served throughout the Government with such distinction, that in whatever new shape the Treasury emerges, let us stick with the long term. Let us stick with stability, let us stick with that fixed purpose that has served us so well so far, and I am sure that in whatever shape that team emerges, it will guarantee the Government and the nation the same success as we have had so far.
I reassure Mr. Robinson that I do not intend to question the Chancellor's sanity, but I do rather question his commitment to social justice for the same reasons that the hon. Gentleman does, with his qualification.
Six months ago, I proposed an alternative dream Budget that was tax-neutral and included the following features: a 2p cut in income tax; lifting the upper earnings threshold and aligning income tax with national insurance; making greater use of environmental taxes; cutting corporation tax, and offsetting it with reduced allowances on business taxation; and getting rid of the 10p rate of tax. When I got over the frisson of flattery at discovering that that had been mercilessly plagiarised in the Budget, I realised, as many of us did, that there was one important detail that was different: the conversion of the 10p rate not to zero but to 20 per cent. That is a big difference, because instead of 2 million people paying no tax at all, they are paying more tax. That goes to the heart of what the Budget is about. It is not about economic management—it is economically neutral, which is a positive factor—but it is about redistribution and equity and how the gains and losses have fallen.
There has been an attempt to introduce another dimension to the debate: what the Conservatives call distributing the proceeds of growth and what the Government call the third rule. That is a somewhat arcane debate because, as I perhaps rather simple-mindedly see it, the Chancellor is already redistributing the proceeds of growth. Approximately 40 per cent. of any increment in growth has been allocated to the public sector, and the remainder has been allocated to private investment and consumption. That is the forecast, and I am perfectly comfortable with it. Unless the Conservatives are willing to set out a different number and how they propose to achieve it, we all have to operate on the working assumption that we are reasonably content with the share of the state in gross domestic product. That is where I start from.
I want to tackle the Budget on the Chancellor's own criteria, and pose three simple tests: is it fairer, is it greener, and is it simpler? On fairness, a useful benchmark is where we are in income and wealth distribution. The data that the Government have made available are a little dated, but the Government suggest that income distribution, measured in the usual statistical way—Gini coefficients and so on—is roughly what it was when the Conservatives left office. It deteriorated for a while, it then improved a little, and it is now more or less what it was when the Conservatives left office. Help for income redistribution has been provided by tax credits, whatever their other problems, but income redistribution has been worsened by the council tax, which is regressive in relation to income. The problem area is the distribution of wealth, and that was the purpose of the question that my right hon. and learned Friend Sir Menzies Campbell, the leader of the Liberal Democrats, asked the Prime Minister last week.
It is shocking—and it is difficult to explain—that whearas when the Conservatives left office the wealthiest 1 per cent. of the population had 26 per cent. of marketable wealth or financial assets, that figure has now gone up to 34 per cent. When the Conservatives left office, the bottom 50 per cent.—the lower half of the British population—owned 6 per cent. of the country's asset wealth. That has now shrunk to 1 per cent. under a Government and a Chancellor who often use the language of social justice, which is an appropriate criterion against which to measure the Budget.
The impact of the combination of the 10p tax rate change and the reduction in the standard rate is complex. The Institute for Fiscal Studies has run through the numbers, and it has concluded that one in five people lost out. Almost all of them are low earners who are single or childless couples. A couple of people who came to my advice surgery last Friday illustrate the problem perfectly. One was a widow with part-time earnings, who has never paid more than the 10 per cent. tax rate, as she is in the £5,000 to £8,000 band. She will simply pay more tax, without any offsetting credit. She is struggling to pay council tax and all the other impositions that she faces. The other was a young man who has just graduated and is starting life as a graduate scientist in the under £18,000 band. He is a loser, and he does not have any offsetting gains. Those are the kind of people who lost out in the Budget. In a way, that is not surprising when we recall what the Chancellor said when he introduced the 10p tax rate—the progressive policy that he is now reversing:
That policy is now being reversed.
On the other side, we have to ask who benefits from the Budget, because people clearly have benefited. Some groups have benefited substantially. It is particularly worth focusing on one group: wealthy pensioners. Someone with a pension pot of £1 million, which is certainly reasonably wealthy, and from which with sensible investments they will receive an income of £50,000, will benefit substantially in several ways. They benefit from the lifting of the upper rate of tax. They will not pay national insurance and crucially, and rather oddly, the Government have retained the 10p rate for unearned income. That is difficult to understand. I remember the days when the Labour party put 98 per cent. tax on unearned income as it was considered rather evil, but now it is treated preferentially. When people earn income they have to be charged 20 per cent. at the first rate, yet they pay only 10 per cent. on unearned income. Affluent pensioners who are paying into their savings will receive additional top-rate relief of 40 per cent. and so on, so they benefit in several respects. I do not begrudge them that, but it is worth noting that they are the principal beneficiaries of the Budget.
Pensioners who are not merely wealthy but have large capital assets that they realise in the form of capital gains, and take advantage of the maximum taper relief, could also pay as little as 10 per cent. The 10 per cent. rate has gone for wage earners but it remains for unearned income and for capital gains. We saw a good practical illustration of that the other day. When Sir John Ritblatt stood down as chairman of British Land he described frankly how he had been able to benefit from the Chancellor's tax relief. He had gained about £20 million simply by being able to take advantage of the reliefs on the large share portfolio that he held as chairman of that company. There are beneficiaries of the Government's tax changes, but they are not the people about whom the Government should primarily be concerned.
I have one more point about distribution and fairness. We know that the Government have laboured for 10 years to produce changes and alternatives to the council tax system. We have had the Lyons report, which runs to about 600 pages—I do not know whether anybody in the Chamber has actually read it yet. The report offers the Government two alternatives. One is to change the system radically in a way that reflects ability to pay, but the Government clearly do not want to go down that route. They were offered the alternative of ameliorating the system somewhat by changing the number of bands. It is striking that we have heard not a peep about how the Government propose to respond to the Lyons report, if at all. Their most regressive tax has been laboured over and endlessly reviewed, but at the end of the day the Government have absolutely nothing to say about it.
In terms of greenness, it is clear that there are some changes which, as far as they go, are perfectly welcome and are things that we have advocated. We would argue for a much wider band of vehicle excise duty rates, along the lines recommended by the all-party environment group. The Government have made a small move in that direction and we have no question about the principle of vehicle taxation. However, we are more critical about what they have been doing in respect of the aviation sector. It has long been realised that airlines pay nothing remotely like the amount of tax they should, for a variety of reasons: partly because of pollution and the absence of any form of fuel duty, although there are of course good treaty reasons for that; partly because the slots available to them free of charge take no account of the externalities and congestion involved; and partly because their landing charges are cross-subsidised. For a long time there has been a powerful case for significantly increasing and changing the nature of taxation on aviation, but in a very cack-handed way the Government have introduced ticket duties that have caused a great deal of damage to small tourist operators because of the retrospective way in which they were applied.
The more important economic point is that the tax bears absolutely no relation to the environmental impact. Charges are on tickets rather than on aircraft. We have the absurd phenomenon that in Mr. Stelios's Easyjet, full to the gills, every passenger pays the full air traffic duty, whereas half-empty flights leaving from major airports pay far less tax because it is levied per passenger rather than per aircraft. It is a highly inefficient, environmentally ineffective form of taxation and needs to be radically changed if the Government are really serious about environmental impacts.
My third question is whether the Budget has introduced more simplicity. The answer is yes in some respects, and that is welcome. We have got rid of a rate of direct taxation, which is desirable. The alignment of national insurance and income tax is a difficult reform, for which tax reformers have long argued, so it is welcome that the Government are moving in that direction. It is also welcome that they have embraced at least the principle of cutting corporation tax and reducing allowances.
However, in some respects the simplification is not working—or not working satisfactorily. I wholly identify with the comments made by the Conservative spokesman, Mr. Prisk, about the impact on small business, which will lose about £850 million as a result of the changes to incorporation. Corporation tax on such businesses will rise in effect from 19 to 22 per cent. and they will receive only a proportion—we do not know how much—of the new capital allowance. There will be damaging effects for them.
Where the tax system is inherently complicated there are the severest problems. My hon. Friend Sir Robert Smith rightly raised the appalling problems that are being created for North sea oil revenue. The Secretary of State dealt with them at some length, so I shall not rehearse all the arguments. The key point is that the Government cannot entirely escape responsibility for the collapse in revenue. Tallow, one of the operators, describes the current tax rate, subsequent to the supplementary tax of two years ago, as punitive relative to the vast increase in costs. I think costs have risen by several hundred per cent. in the North sea. Another operator, Premier Oils, says that it no longer makes sense to develop the fields. It is not as though the situation was not foreseen. The Liberal Democrats opposed the tax increases; my hon. Friend the Member for West Aberdeenshire and Kincardine spoke eloquently and at great length predicting exactly what has now occurred.
Complex tax changes are involved in another area where they are bound to have negative impacts: the provisions relating to management service companies and IR35. The Conservative spokesman did not mention it, but we argued the case several years ago. I can understand where the Treasury is coming from. There are undoubtedly people who abuse the system. There is evasion of national insurance and we understand that the Revenue has an obligation to try to deal with it, but our practical experience is that the Government's actions, unless they are carefully calibrated, will be completely counter-productive. Although there are people who cheat, hundreds of thousands of people need to operate on flexible contracts. Unless the tax system captures that there will be considerable costs. I shall give some examples.
Grant Thornton, the tax adviser, has already warned that one of the knock-on effects of cracking down on contractors will be a big increase in the cost of the Olympics, because the project will be financed by flexible contractors. If we lose them, the costs will rise. The main user of flexible contract workers is the NHS, whose costs will rise if the Government get things wrong. Public sector IT contracts are already escalating out of control and that situation could be seriously aggravated.
Although the Government can reasonably claim that they have improved the tax system through simplification in some respects, there are many areas where they already have caused, or will cause, serious damage.
The hon. Gentleman rightly points out the difficulties. Is he aware that the Professional Contractors Group has been involved in about 1,200 cases brought by Her Majesty's Revenue and Customs? Is he further aware that of the cases that the Government have prosecuted only three have been successful? Given the Government's claim that the measure would be a marvellous way of drawing back tax revenue, does he agree that in fact it has proved to be completely misguided?
The figures that the hon. Gentleman has mentioned are telling and I am sure that they will be used in the debate. Unfortunately, PCG lost its major test case several years ago—otherwise many of these problems would not have arisen.
I want to finish with a couple of remarks about the broad economic picture, which I have not referred to. It is obviously clear—I have always acknowledged this; there is no point in denying it—that the British economy is in good shape. It is growing and stable, and we have relatively low inflation. However, there is a danger of getting too carried away with that idea, and the Chancellor tends to do that. It is worth remembering that, although our performance in growth terms is relatively good against the big G7 countries, particularly in Europe, if we compare it with all the countries of the Organisation for Economic Co-operation and Development, the picture is much less flattering. Indeed, we are 22nd out of 27 EU countries in terms of economic growth, because the small countries are much more dynamic.
We also need to remember why, although the Chancellor talks a good story about economic performance, it is clearly not appreciated at street level. At the moment, people's real disposable income is being squeezed. People are experiencing a real reduction in their take-home pay, because the rate of inflation, which has spurted and is now at its highest level for something in the order of 12 or 13 years— 4.5 per cent. more in the retail prices index—is considerably greater than the growth of earnings. People's take-home pay is being squeezed. That is how people perceive economic performance.
There are also two major problems looming up with which the Chancellor's successor will have to deal. They are not easy. The first is the big squeeze that the Government envisage in respect of public spending. I do not want to exaggerate it. The Institute for Fiscal Studies captured it very well: in the Government's period of office, public spending growth has moved from famine to feast to diet. Whether that diet is painful depends critically on what happens in respect of the so-called Gershon efficiency savings. The Government are making some heroic assumptions about the ability to deliver improved front-line services through efficiency. I hope that they succeed, but the problem that the recent National Audit Office study identified is that, of all the savings in efficiency that the Government have claimed, they can verify only 25 per cent. The rest are either non-existent or cannot be traced. That is a pretty damning indictment.
The other area where the public spending squeeze will be more painful than is currently appreciated is in relation to the knock-on costs of a lot of the hire purchase agreements—normally called private finance initiatives—that are feeding their way through the system. It is striking to look at the table in the Red Book showing the current PFI contracts. Half of them are in the Ministry of Defence, which is not an obvious area for PFI negotiation. Essentially, the Ministry of Defence is purchasing services on an HP basis. That is already taking up 4 per cent. of its budget and it has another £50 billion of contracts on the way. In that way, it is postponing the choice between front-line military services and military equipment, but that will have to be faced—and it will be brutal—when the comprehensive spending review appears in a few months' time.
My final point is about stability. Of course we have had economic stability and let us hope that it continues, but there was a revealing comment last week from Eddie George, looking back retrospectively on the period that he spent chairing the Monetary Policy Committee. He acknowledged that, in order to save the country from a serious downturn in 2000-01, he and his colleagues had injected monetary expansion into the economy, the consequence of which was a major bubble in debt and in the housing market. He used the phrase, "This is not sustainable." If we look at the figures, it is all too clear why it is not sustainable. House prices in relation to disposable income have doubled in the period since the Government came into office. That is exactly what happened in the period between 1982 and 1988. This is a cyclical and unstable market.
I do not want to predict doom and gloom; I have no idea what will happen, but at the very least the Government should think ahead about a scenario in which things go badly wrong, debt becomes unsustainable and the market deflates. They should talk to the banks about how to handle the large number of people who may well find themselves having mortgage payment difficulties. The numbers are already growing rapidly. There are no safety nets, because Mr. Lilley, when he was the Minister with responsibility for social security, removed social security support. The argument at the time was that the gap would be filled by insurance in the market. That has not happened. People are not protected if their incomes disappear and they are made redundant. We are going to face large numbers of people who are in great distress and who are unable to service their debts. At the very least, the Government should give an indication that they are thinking ahead about how to handle a problem that in the medium term could be the most serious threat to stability.
I welcome the Budget, but I have a few points to raise about issues of concern. We need to look at exactly where we are. The truth is that employment has risen by over 2.6 million since we came into office. We have the highest employment rate in the G7 economies. The new deal has helped nearly 900,000 young people into work. The adult rate of the national minimum rage will soon be £5.52 an hour and the national minimum wage will be £4.60 for young people. But those of us from areas that have suffered economic deprivation over the last 20, 30 or 40 years, are watching closely to see the impact of the Budget.
I accept the points raised by the Opposition about the impact of the 10p rate being removed and also about the issue of working tax credits. Working tax credits themselves are a good thing. If they are not working properly—as in far too many cases—they do not help. If they help, it will be true that, by 2009, a family with two children will, in effect, be able to earn £24,000 before paying tax. That is a good thing. However, it behoves the Government, the Treasury and the Department for Work and Pensions to make sure that the tax credit system is sorted out and works—for the benefit of people outside and of our party and our Government.
The TUC brief was clear. The TUC said that it believe that, as a result of the personal tax changes, by April 2009 families will be at least £200 a year better off. The poorest fifth of the population could be £50 better off. A single earner, on median earnings, with two children could be as much as £500 a year better off. But that will happen only if we get the tax credit system right. That is a challenge for our Government. Child poverty figures will be 200,000 lower. It is welcome that 600,000 fewer pensioners will pay income tax. It is right that only 43 per cent. of pensioners will pay tax.
I want to talk about what is happening where I live. In 1986, I worked in the coal-mining industry in a village where male unemployment was 19.6 per cent. Then the pit was shut and 720 men were sacked, so the situation got even worse. Today, unemployment is 3.7 per cent. Even going back to 1997, there has been a drop in unemployment of 57 per cent. since then. Two years ago, the jobcentre was knocked down so that a factory that builds earth-moving equipment could be extended. That is a great sign of progress and we should all welcome it.
I want to move on to education and, in doing so, I want to try to answer the questions that the Opposition have asked over the last four or five days about where the money goes—a theme I want to come back to. The truth is that education spending will rise to £90 billion by 2011—the highest level ever. Spending will be increased from 4.7 per cent. of GDP in 1997 to 5.6 per cent. in 2011. Surely we should all welcome that. Because of that increased investment, we will be able to provide one-to-one tuition for 600,000 children, to double apprenticeship numbers to 500,000 and to increase higher education student numbers to 1.2 million. We will be able to make every school an extended community school—the schools are up for that. We will be able to increase spending from £2,500 per pupil in 1997 to £6,600 in two short years from now. Surely we can all say yes to those figures.
We have to welcome the Government's commitment to implement the Leitch review. We all know that there is a skills shortage in this country and that we must up skill our adults to ensure that they can compete in the global world. When the Bill to achieve that comes before the House, I hope that it will receive cross-party support. We should welcome the fact that there will be 3,500 Sure Start centres in this country in the next two years. We will also increase the amount of education received by three and four-year-olds to 15 hours a week.
The hon. Gentleman's passion for education and support for increased investment is clear to the entire House. Does he feel betrayed by the breaking of the promise in the Labour manifesto to increase the share of national wealth spent on education, which the Budget fails to deliver? By 2011, which is the year that he cited, the proportion will not have increased.
I could argue about the figures, but I will not because I do not have time. The reality is that the spending will be more than it was when we came to power. It will represent 5.6 per cent. of gross domestic product—£90 billion. I wonder what the amount would have been if the hon. Gentleman's party had won in 1997. It would have continued going backwards, as it did when the Conservatives were in power.
We have been successful locally. I will probably bore people to death by telling them what has happened on the ground, but I do not mind that. Let me point out the A-level pass rate in five comprehensive schools in my constituency. The pass rate at Whickham comprehensive school is 98 per cent. It is 94.4 per cent. at Hookergate and 100 per cent. at Ryton comprehensive. The rate is 100 per cent. at St. Thomas More and 97.1 per cent. at Lord Lawson of Beamish.
Let me turn to O-levels. In 2005, Gateshead was ranked as the eighth best performing local authority in the country with 65 per cent. of pupils achieving five passes at A to C. Last year, nearly 70 per cent. of pupils achieved those grades, which made Gateshead the fifth best authority in the country, with a figure well above the national average of 59 per cent. The percentage of passes at A to C increased at Hookergate from 39 per cent. to 52 per cent. The figure at Lord Lawson stabilised at 78 per cent. The rate increased at Ryton from 59 per cent. to 62 per cent. At Whickham, the figure increased from 78 per cent. to 84 per cent. Unfortunately, the rate at Thomas More stayed the same—at 100 per cent.! We should all be proud that those people are getting more than five O-levels.
Our primary schools have achieved results that are well above the national average. Whickham Parochial school is the third best school in the country for top 200 scores at level 5. Results in maths, English and science are above the national average. Our primary schools are ranked 26th in the country for added value, and we will open seven brand new schools in the next year. That is where the money is being spent.
I come to another non-contentious issue: the health service. The Tories say that there was no mention of health in the Budget, but there was. The Chancellor said that there would be £8 billion extra. Yes, that £8 billion had already been announced, but it will be spent in the next year—an extra 10 per cent. spent on health. That will go towards the trebling of health spending since we came to power in 1997, which was in the manifesto. The NHS now has a work force of 1.36 million, with 300,000 more employees than in 1997. Vacancy rates are at an all-time low.
I have great concerns about the people who have lost their jobs in the health service. I was a president of Unison, which represents more health service workers than any other union in this country, so I have a right to be concerned. Last year, there were 1,446 compulsory redundancies. That was far too many—1,446 too many—but it was not the 21,000 nurses that the Tories were talking about last year. That really was a con trick.
There is no doubt that Ministers and managers in the health service need to get their act together, because what is happening in the health service is not by any means in order. They need to put the health service right. However, the fact that there are 100,000 more nurses and doctors than there were in 1997 is a success. It was a failure that nearly 300,000 people were waiting for operations in 1997, but it is a success that no one now waits as long as people did then.
My hon. Friend and parliamentary neighbour is absolutely right. Phrases such as "winter beds crisis" and "waiting on trolleys" have gone out of the vocabulary. When did we last see anyone waiting on a trolley? That does not happen any more because people are looked after straight away.
We are asked, "Where's the money gone?" Pay has gone up. Nurses' pay has gone up by 61 per cent. in 10 years, or 27 per cent. in real terms. The pay of support staff has gone up by 67 per cent., or 32 per cent. in real terms. That is welcome, but I need to say something to my Government: phasing this year's pay rise is out of order. That is not what the nurses and health professionals of this country expect or deserve. The pay review award should be paid in full. Health workers deserve no less, and to pretend otherwise is an insult. Go back, please, and look at this again, or we could be facing real problems in the NHS.
Where has the money gone locally? I am sorry, but I am going to bore hon. Members again. New facilities in Gateshead include the Bensham walk-in centre, which opened in 2004. A new medical practice in Teams opened in 2005, as did an out-of-hours service for people not registered with a dentist. New pharmacies have opened and a low-vision centre has been set up. Retinal screening for people with diabetes has been improved. There is a new condom distribution scheme and a health trainers project. We have a triage service in paediatric speech and language therapy—I could use it! New facilities in Blaydon include the new Whickham cottage medical centre and new GP practices, with two additional GPs. There are new facilities in Chopwell—the Pioneer centre—and new optometry practices in Crawcrook and Birtley. That is where the money has gone—but that is not all.
The money has also gone on increasing staff numbers. We had 147 doctors in 2002, yet we had 161 in 2005. We had 135 GPs in 2002 and we have 146 today. There were 574 non-medical staff in 2002, but 793 in 2005. We had 74 qualified allied health professionals in 2002 and there were 102 in 2005—the list goes on. Hon. Members will not be surprised that while we had 29 managers and senior managers in 2002, we now have 55—that is the group that has seen the biggest growth. What are they doing?
Those are the words of Age Concern; they are not my words or those of the Labour party. It is good news that the point at which over-65s will start paying tax will increase and that no pensioner aged over 75 will pay tax on income under £10,000. It is also good news that the financial assistance scheme will be extended and that, at last, all the affected workers will access some help.
I want to raise again the major challenges on pensions with my colleagues on the Front Bench. We must address the problem that 2.1 million people who are entitled to receive pension credit do not claim it. If people will not claim personally, we should go to them. As Lyons recommends, we should set up a one-stop shop with a single telephone line through which people could access pension credit. If the Government wish to argue that the basic state pension cannot be increased beyond its existing rate and that pension credit is the way out, we must make pension credit accessible.
The Government are committed to restoring the earnings link in 2012, if the circumstances are right. We cannot wait until 2012. My Government should support Labour party and TUC policy and reintroduce the link before the end of this Parliament. We all know the history of the breaking of the link—it was done by the Conservative party for political purposes—but if we wait until 2012, 3 million of today's pensioners will be history, and that would be unfair to them.
Winter fuel payments have remained the same for the past two, three or four years. Since 2003, however, gas prices have gone up by 87 per cent. and electricity prises have risen by 56 per cent. We will miss our 2010 fuel poverty target if we do not address this problem. Earlier this year, Ofgem estimated that 4 million households will be in living in fuel poverty by the end of this winter. Just four years ago, the figure was only 2 million. We should look again at increasing the heating allowance by £100 for next winter.
I want to talk about elderly people living in care. The period during which I worked for Newcastle city council as a care worker was one of the most rewarding times of my life. Some 280,000 people living in care homes receive a personal expenses allowance of £19.60 a week. That is absolutely pitiful, and we should support Age Concern's campaign to raise that amount to £40 a week. All those proposals cost money, but it is money that would be spent on the most vulnerable in society. I urge the Government to work with the National Pensioners Convention, the TUC, Age Concern and the dedicated people who care for the elderly to try to put the matter right.
I have listened all week to the Opposition parties crying out about a con trick, and I ask myself whether they listened during the Chancellor's speech. Yesterday, I read an article by Anatole Kaletsky in The Times, which said:
"The con-trick criticisms are mostly spurious. The Chancellor was unusually straightforward in stating, at the very start of his speech, that this Budget would be broadly neutral, with no room for any net tax reductions. It was therefore perfectly clear that any tax cuts announced would be matched by increases elsewhere in the system. All the main tax increases...were presented straightforwardly and were clearly costed in the Treasury's Budget documents."
Those are not my words. He continued:
"The fact is that Mr Brown delivered exactly what most economists, tax experts and business lobbyists had long been demanding—a simplification of the tax system combined with an improvement in its efficiency, achieved by reducing marginal tax rates and simultaneously broadening the fiscal base."
The hon. Lady should write to The Times and ask Anatole Kaletsky that. To give credit where credit is due, someone did listen to the Budget: the leader of the Liberal Democrats clearly listened, and to his credit, he picked up straight away on the 10p issue. Perhaps the old Etonians were not listening; perhaps they were too busy writing their next joke about Stalin and trying to take the mickey out of the Chancellor, but it is clear that when the country comes to make a choice, people will stand up and say, "We will support a strong leader who is not frightened of the civil service, and who is fair." They will not entrust the economy of the nation to Lord Snooty and the Bash Street Kids.
I refer the House to my entry in the Register of Members' Interests. In case anyone has any unworthy thoughts about whether my outside interests will affect my judgment in making my speech, I assure them that they certainly do not. Having put that behind me, let me say that I think that I have listened to my last Budget speech from the current Chancellor. I have listened to 10 of them, and they are a fairly bewildering collection; he has had some fairly dull ones, and some odd ones. This was probably one of the most political that he has made. I suppose that he lived up to my constant expectation that he will surprise everybody. On this occasion, as I shall try to illustrate, his mind was fixed on headlines and politics, not on a responsible policy on public spending, and tax and spend. That distorted his judgment in ways that I shall seek to explain.
Perhaps it is time to reflect on the Chancellor's legacy. Of course I do not claim that he has been a bad Chancellor. The economy continues to perform reasonably well, and we keep adding to the number of years and quarters in which we have enjoyed growth with low inflation, and I congratulate him on that. The four such years that he inherited have had about 10 years added to them, and we have no idea when they are likely to come to an end. However, our performance has not been remarkable compared with that of many other countries, so I do not think that the eulogies that are sometimes heaped on him, and the claims that he is a remarkable Chancellor, are thoroughly deserved, but he has been a good, average Chancellor, and he has certainly performed better than an awful lot of Labour Chancellors.
I attribute his 10-year record to a combination of the legacy that he was given—he inherited an economy that was in good shape, and that was enjoying a run of growth with low inflation—and a remarkable degree of luck, which is something that every Chancellor needs. The fact is that the global scene has been remarkably benign throughout his period of office. Most Organisation for Economic Co-operation and Development countries have enjoyed fairly unprecedented periods of growth with low inflation. The nearest that he got to a global crisis was when the dotcom bubble burst in America, causing great problems in 2000-01. That crisis was averted, as Dr. Cable rightly said, by an influx of liquidity hastily put into the system by Alan Greenspan in the United States and Eddie George in this country. Otherwise, the background has been one of increasing globalisation, which has been extremely beneficial. It has made it much easier to achieve growth with low inflation, because it means that there is downward pressure all the time from low-cost competition from around the world.
In addition, the supply-side reforms of the Thatcher and Major years have begun to feed through steadily, and we find ourselves far more able to adapt, as an industrial economy, to the rapidly increasing amount of change taking place in the global economic climate. The result is that the Chancellor has presided over a reasonably benign scenario.
There are always fragilities, and there are considerable ones in the present situation. It is well for the Chancellor's successor to have an eye to the risks that we face that might stop the current period of growth with low inflation. Some of the unknowns are global ones utterly beyond the control of the British Government, such as the question of what will happen to the American economy over the next year or two, after the remarkable sudden collapse of America's housing market, and given a likely reduction in consumer demand there. There are political problems throughout the world and our situation is not good, either. If I were asked why we are sustaining a reasonable level of growth, I would answer that it is dependent to a remarkable extent on the huge number of immigrants who have come to this country from eastern and central Europe in the past year or two. That has brought in a very industrious work force, but it has probably had more effect on the growth of the economy as a whole than on gross domestic product per head, in terms of improving our performance. The other thing sustaining our present level of growth is the rapidly rising level of public spending, which has not yet begun to slow down.We are too dependent on those two factors.
I will not repeat all the figures that my hon. Friend Mr. Prisk gave at the beginning of his excellent speech to show how our underlying competitiveness in the global economy has steadily deteriorated in recent years. To pick out just one of the indicators that he used, I think that one of the starkest indications of our decline in competitiveness is our balance of payments position. I remember the years when a ridiculous amount of attention was paid to monthly balance of payment figures. Governments changed if the figures went wrong in the wrong month, in the run-up to an election. Of course, the balance of payments figure is only one among many, but our balance of payments now is the worst since records began. It continues to deteriorate and we have to go back hundreds of years to find a similar position.
The balance of payments is a good measure of competitiveness, because it indicates that people overseas find it much easier to sell their goods and services in this country than we find it to sell our goods and services in outside markets. We are not in a particularly competitive position. That is the background to this year's Budget.
The Budget certainly surprised me, because I thought that it was fairly obvious that we would have a low-key Budget, as there was really only one subject that the Chancellor had to address. One of the big weaknesses in our economic performance is the fact that the Chancellor has made a dreadful mess of the public finances. Nowadays, the stability and growth to which I referred depend to a considerable extent on the performance of the Governor of the Bank of England. During the Chancellor's period in office, there have been two Governors, who have performed their task excellently. Of course, I congratulate the Chancellor on his excellent decision to make the Bank independent, but the fact is that responsibility for the health of the public finances is now a bigger part of the Chancellor's role, and he has got himself into an ever deeper mess on public finances. We are still running substantial deficits, and he still fails to forecast the size of those deficits successfully.
Recently, there have been some very good years for growth, and if we had any sensible fiscal rules, such as the one that I held, which was to ensure a balanced Budget over the cycle, we would run a surplus in the current good years of the cycle; that is what we should do if we are to achieve any kind of sensible health in public finances in the longer term.
I shall not bother with the Chancellor's discredited fiscal rules, which he always tells us he still adheres to, having so manoeuvred the goalposts over the years that they are rendered completely and utterly meaningless. The fact is that we are running an unstoppable deficit and he had to address it. Everybody knew that and, to be fair, he has done so in the Budget, though he certainly tried to bury it.
The right hon. Gentleman has been a tax-and-spend Chancellor on a colossal scale since his Pauline conversion back to taxing and spending in about 2000. He came into office saying that he abhorred the whole idea of being a tax-and-spend Chancellor, and he was extremely severe in his first few years. When he was following my figures, as he always used to say, he finally got the level of public spending in this country down to 37.1 per cent. of GDP in 1999, but in 2000 he began to expand public spending on a grand scale, and he began to increase the tax burden and public borrowing greatly as well.
The result is that the budget deficit was troublesome and needed to be addressed, and no sensible fiscal rule could be hit over the next cycle unless something started to be done with that deficit now. We have reached a situation in which tax, in terms of the tax burden and the tax take from the GDP and spending levels as a proportion of GDP, have been taken back to levels that we have not seen for about 20 years, since the early years of the Thatcher Government.
The difference between the position of the present Government and the Thatcher Government in the early 1980s is that the Thatcher Government had inherited a fiscal crisis from their predecessor, and Sir Geoffrey Howe made determined efforts to get it under control and to get budget deficits and public borrowing requirements on a downward path, whereas this Government have presided over a steady growth in the level of public debt and are belatedly, after many years of warning, finally realising that they have to address that.
So the Chancellor has got himself into a position where he had to increase taxation and he had to announce more controls on public spending. It was plain as a pikestaff to everybody looking at the principal problem facing the Chancellor of the Exchequer when he came to the House that he had to do those two things. On tax, I regret that he had to do that. I would have controlled public spending very much earlier than the Government have started to do so.
I did not think the Chancellor would raise taxation in his Budget because he had done what he always does nowadays—get that out of the way in the pre-Budget report before Christmas. He now makes a regular habit of that. The pre-Budget report, which started as a process, allegedly, of consulting for the Budget to come, is now a lesser-noticed occasion on which he tucks away bad news that he does not want to save up until he makes the major speech in March. In that pre-Budget report he raised £2 billion-worth of extra tax revenues.
If we take not only the last pre-Budget report, but the last two pre-Budget reports and the 2006 Budget, we can see that the Chancellor has raised £6 billion- worth of extra taxation. Hence he has got the tax burden on the economy as a whole up to a near record-breaking level. As has been pointed out, in this Budget he added a further £1 billion to the burden of taxation on business. I shall return to that in a moment.
Tax was not the Chancellor's principal concern. I waited for more news on spending, which is the key thing. There is, of course, the comprehensive spending review. The Chancellor is trying to impose on his successor much tighter controls on the level of public spending once he is out of office than he has ever been prepared to accept since 2000. It is a strange comprehensive spending review, because it keeps being put out in dribs and drabs to make bits of it sound more attractive than they otherwise would be.
To be fair, the Chancellor has added to our knowledge of the expectations for the growth of public spending under a Brown Government. It will be sharply reduced. It will be reduced below the likely level of growth of the economy as a whole, which Conservatives from the Front Bench, and I, and others from the Back Benches, have been urging for a considerable time. It is called sharing the benefits of growth. That is what he is doing. We now know that over the next three years, the growth of total public spending will be, in real terms, 2 per cent. per annum, well below trend growth of the economy and, if we are lucky, assuming that benign conditions continue, well below the likely actual growth rate that we will achieve.
So public spending as a proportion of GDP will at last start coming down again, though in fact, on the Chancellor's own figures, it will still be above 40 per cent. at the end of the three-year period, so the reduction is not as drastic as it should probably be. I always aimed to get it below 40 per cent. and the Chancellor followed that target when he first came into office.
The other announcement that the Chancellor made was about education. We now know that the growth in education spending will be, in real terms, about 2.5 per cent. over the next three years. That is a very sharp reduction in the growth of education spending, which has been at about 4.5 per cent. in real terms in previous years. Following on from the remarks of Mr. Anderson in his very good speech, which I have the pleasure of following, that seems to me a reduction in the proportion of GDP being spent on education, as it is likely to be below the growth in the economy. I seem to recall that at the last election, the Government were pledging the reverse, as has been pointed out.
We have very sharp falls in the rate of growth of public spending. I do not dispute that. It is long overdue. We should not have had a period of famine followed by feast followed by famine, or by diet. Given that the years of feast have resulted in the money being spent so badly and public authorities getting casually used to considerable increases in real-terms spending each year, I know of no policy direction that the Government are following that will help those who manage the services to cope with the sharp reduction in the growth of their budget.
When I talk to people in education or the health service, they are completely unprepared for that. There is a slight tendency out there to believe that that cannot happen, after they have been buying their way out of trouble on most fronts so much for the past few years. The money has gone largely into payrolls, very considerably into pay increases in some important parts of the health service, and has mainly achieved a sharp drop in productivity in our key public services, without adequate improvement in the quality of service to show the hard-hit taxpayer.
I do not understand how, if one looks back over the Chancellor's period, there is the slightest strategy in any of this. I have already said that I do not think the golden rule and the sustainable investment rule make any sense at all now. He has just responded to events. He first tried to build a reputation for prudence, then he panicked in 2000 and he and the Prime Minister started to throw money at everything. Now the public finances are in a mess and he is putting out in dribs and drabs the least damaging indications that he has of a slow-down in spending. Across the public service as a whole, that will cause great difficulties, some of which we already know.
Maintaining a freeze on Home Office spending after years in which the Government have been doing their best to increase the prison population at a fantastic rate seems to me to be almost impossible. If the prison population continues to rise at the rate at which it has risen in recent years, as the Home Secretary has tried desperately to get the right headlines in all the most popular right-wing newspapers, it will merely mean a tremendous squeeze on spending in every other part of the criminal justice system, including the police, the probation service and the Courts Service. No doubt that explains the Prime Minister's sudden and remarkable conversion to the policy of reducing the number of people in prison. We will see that sort of thing across the board as the real impact of the comprehensive spending review hits public services, and the Budget has given us a few more of the details.
Of course, the Chancellor did not confine himself to that. I had expected his speech to contain a great deal about the public finances and about how he had already covered the tax situation and would now cover spending, but that was not the sort of speech he wished to make on the eve of his translation to the office of Prime Minister, when he will have the pleasure of appointing a Chancellor of the Exchequer who can preside over the difficult nitty-gritty of returning the public finances to some sort of healthy state. Instead, he made a wholly political speech aimed, as far as I could see, at the next day's headlines. However, it did not even work on that front, because he only secured headlines of the sort that he wanted in the most gullible newspapers, which I strongly suspect had been briefed to look for a particular theme in his speech before he delivered it. The other newspapers, which were able to analyse it overnight, realised that it was not a great tax-cutting speech, but that was the political note on which the Chancellor wished to leave.
The first thing that impressed me about the speech was that it was governed entirely by the Chancellor's position vis-à-vis my right hon. Friend Mr. Cameron, the Leader of the Opposition. Mr. Robinson said that he admired a Chancellor who was not concerned by the up-and-down fluctuations of opinion polls. I do not believe a word of that. The Budget speech was written when the Chancellor had read some opinion polls and seen what his ratings were in relation to my right hon. Friend the Leader of the Opposition. He then decided on the old new Labour practice of triangulation, which the hon. Member for Coventry, North-West remembers only too well: he decided to go for what he believed were the strong points in my right hon. Friend's position. As he appears to imagine that our appeal depends on tax-cutting, he presented himself as the tax-cutting Chancellor, cutting income tax and business taxes in one and the same speech.
I actually think that that was a slightly bogus view of where the Opposition stand. Personally, I admire my right hon. Friend the Leader of the Opposition and my hon. Friend Mr. Osborne, the shadow Chancellor of the Exchequer, for being so responsible. We have said over and over again that we put the stability of the economy first. No one will follow this Government's period in office by being able to make quick reductions in taxation. Indeed, my right hon. Friend usually gets into more trouble through disappointing the more enthusiastic of our party's supporters by refusing to hold out the prospect of near-term tax cuts. The Chancellor of the Exchequer and the Government decided that the Chancellor would shoot a fox of some kind—one that he, at least, saw coming out of the burrow—by announcing himself as a man who would cut the rate of income tax and business taxation—but, of course, he did not do so. That was rapidly discovered, and has had some fairly perverse effects.
I shall deal with the two principal issues. First, there is the cut in corporation tax. There is a case—indeed, many Conservative Members have been making it—for reducing the headline rate of corporation tax, which has steadily been left behind as all our competitors have reduced it, by making some cuts in allowances. We might have been given a little more explanation of how the impact would fall, however, because different sectors of the economy will be affected in different ways. There is no doubt that the move is of huge benefit to the financial services industry, but cutting all the capital allowances overnight will have been very unattractive to heavy manufacturing and the utilities, which will be very adversely affected.
I agree with all the Members who have said that the most baffling aspect of the headline cut in corporation tax was that it had to be paid for in part by an increase in the small business rate of corporation tax. The Secretary of State for Trade and Industry did his best, saying, "No, no, there will be no trouble whatever." He has set out the allowances, which some businesses can claim. It is true that some small businesses will be able to take advantage of the allowances, but he does not believe that they all will. A 3 per cent. increase in the small business rate is an extremely unattractive way of raising some of the money so that the overall burden of business taxation will still increase. The extra tax on small business raised £850 million, with the result that the burden of taxation on business is still rising while the Chancellor stands there trying to bask in the glory of being the man who cut corporation tax and taxes on business in his last Budget.
The effects are even more perverse in relation to personal taxation. I always put my cuts in the standard rate in the last paragraph of the Budget as well—usually after I had put up a lot of other taxes. As a theatrical gesture, it is not original, but this one was neither successful nor very well concealed. Because the Chancellor wanted the headline about 2p off the standard rate, he has had little regard to how that redistributes between different sections of the population, especially given the other things he has done to the national insurance ceiling and the bottom rate of income tax.
To an extent I welcome that, because the Chancellor has found a way of paying for it by taking from Peter to pay Paul, and some of the Pauls are quite deserving. One of the recent problems in our economy has been how few of the benefits of economic growth have got down to ordinary wage earners and workers on ordinary incomes, and they will benefit from a cut in the standard rate. A remarkable feature of recent years, which the Chancellor has not addressed, is that the disposable incomes of people in the middle bracket have hardly risen at all—by less than 1 per cent. a year—during the past four years of economic growth. It is worse than that. The discretionary spending available to the ordinary family on average earnings has dropped, because while their incomes have remained pretty much stable, they have found that bills they cannot avoid paying, such as council tax, utility bills and mortgages, are going up. The retail prices index, which covers the kinds of items that the ordinary family spends heavily on, has been outstripping the rising incomes of many ordinary families. They will benefit from this Budget.
It is an inescapable fact, however, that low earners have suffered most. Couples and single people with no children in the lowest earnings bracket will be most out of pocket. Attempts have been made to compensate some people with children through tax credits. However, the take-up of child tax credit still cannot be got above 80 per cent. The system is fiendishly complicated, and I have always criticised it for that. I never predicted that the Revenue would get 50 per cent. of cases wrong each year, and I never expected to meet so many people suffering hardship and coming to my surgery, and those of other hon. Members, because they have received tax credits and then found that the Revenue is demanding from them thousands of pounds in repayments because of a mistake that it has made. I have never met a tax credits claimant who understands how the figure for their tax credits has been arrived at. It seems from the cases that I have dealt with that half the officials of the Inland Revenue do not understand how to get the calculations right.
That is not a very good mitigation for taking away the 10p rate, despite the hon. Members for Coventry, North-West and for Blaydon trying to cheer themselves up when they reflected on the effect on lower-paid earners in their constituencies. There are plenty of two-earner families where the second earner cannot claim child tax credit even if they have children. I disapproved of introducing the 10p rate. It was a gimmick when the Chancellor introduced it. He used it for political purposes, and it complicated the system. I always looked forward to its being removed, but it has been done in an extremely cack-handed way. I assumed that it would be impossible for any Chancellor to increase the tax burden on lower earners again. I assumed that we would have to wait until we could eventually afford to freeze the ceiling and raise the threshold of the rate until the ridiculous invention eventually vanished. Doing it because he needed the headlines now will reduce the income of some very poor people next year.
Who has benefited? It is no secret that I am over the age of 65. I never describe myself as a wealthy pensioner, although the capital value of my pension as a long-standing Member of this House is quite high, so I am fairly comfortably off. I have not done the exact calculation, but I think that I am substantially better off as a result of the Budget because I do not pay national insurance, nor does anyone else above the age of 65, so 2p off the standard rate is a useful benefit. Like everybody else, I have been getting more heavily taxed by the Chancellor, so any remission of that is gratefully received. However, I do not for the life of me understand why people like me are benefiting at the expense of those on low incomes, who earn at the level where the 10p rate was important to them. There is no rationale for that. For political purposes, the Chancellor has made headline-seeking announcements, which have a fairly arbitrary effect on businesses and individuals. That is no way to set about improving this country's public finances, and certainly not the best method of simplifying the tax system.
I object to the current form of the Budget speech. I hope that the next Chancellor will go back to being a little nearer the rules for Budget speeches. The old rules were quite strict and made for boring long stretches of speech, but they required all tax changes to be properly explained. I must admit that I got away from some of that a little, by leaving things that were of interest only to accountants with a handful of clients to the Red Book. However, I did not do what happens now. The Budget speech used never to be a political speech that was designed to give a totally misleading impression to the next morning's newspapers. No Chancellor in the past attempted to gabble out figures at the rate that this Chancellor does, in a not unintended attempt to ensure that nobody can follow the Budget's precise impact on the public finances. The Chancellor switches from cash figures to percentage figures. The dates all come out in a tumble. It requires a miracle for anyone in the House to follow the details of the speech, because he wants us to hear the headlines of 2p off corporation tax and 2p off income tax. He is determined that no one in the House or the Press Gallery will understand any of the downside by the time he sits down.
That is unhelpful and I fear for the Chancellor's reputation when he becomes Prime Minister. His good friend the hon. Member for Coventry, North-West did his best to protect him as an individual, and I have always acknowledged that I do not dislike the Chancellor as a man, but his political style puts him in serious jeopardy as he embarks on his next job. He is not charismatic and never will be—I do not criticise him for that. He has the reputation with the public of being a political heavyweight. He scores well on trust and has been around for so long that he is almost part of the British constitution. He is a formidable figure in a Government of whom one cannot say that the entire Cabinet is composed of formidable political figures. However, the Chancellor's reputation has been sinking recently and the public's reaction to the Budget speech will be damaging to him. It was not the right farewell to his period as Chancellor to go in for a Budget that was a blatant attempt to mislead the public about what he was doing. Only the most loyal sections of the Murdoch press were inclined to buy it.
I was looking forward to a period of more straightforward presentation of public policy—a little less spin, to use the cliché—and less of the extraordinary manner whereby information comes out of the Government, but the Chancellor, under the pressure of events, the pressure from my right hon. Friend the Member for Witney, and impending responsibilities, is showing signs of taking up new bad ways of disseminating information. It will not work. If he continues in that way, I am afraid that I wish him a premiership that is much shorter than his tenure at the Treasury.
The Chancellor's successor—I hope that the nationality of the Secretary of State for Trade and Industry is not fatal to his hopes—will have a miserable task in implementing what has to be done to the public finances. I trust that whoever it is will give us a much more straightforward and open Budget, with a candid account of what has to be done, this time next year.
I was interested to hear what Mr. Clarke had to say. It sounded to me as if he wished he was in a position to deliver what the Chancellor is delivering. There is nothing wrong with admiring the Chancellor. In fact, the hon. and learned Gentleman has had his admirers, too. When he said that he thought the Chancellor was average, could he have been describing himself? He mentioned the Prison Service, for example, and prisons are pretty full, but I remember when Lord Ferrers was in Stoke Aldermoor in Coventry: his attitude was "Bang them up". That was the attitude of the ex-Chancellor's Government and the general attitude to law and order.
Under the stewardship of the previous Government, we certainly remember the lack of policemen, whereas this Government have increased police numbers. We can debate whether they are at the right or wrong levels, but we have increased the number of policemen on the streets, just as we have increased the number of wardens and assistant police officers on the streets, particularly in the inner cities.
The right hon. and learned Gentleman mentioned opinion polls. Well, he alleged that this side of the House was obsessed with them, but his new leader is also obsessed by opinion polls and image. Reductions in tax were mentioned, so let me remind the right hon. and learned Gentleman about debates on 17 per cent. VAT on fuel. We had many a debate in the Chamber on a Friday morning about the £10 winter allowance, which the previous Government did not do much to putup. We should also remember the Conservative Government's record on the pensions link—they actually broke the link. To hear Conservative Members on their high horses tonight, nodding their heads when people talk about restoring the link, is, quite frankly, nothing short of hypocrisy when they were the party that took it away.
Will the hon. Gentleman travel back in time to 1980 when the link was broken? At that time, this country was economically on the floor after years of failed socialism, so the Government were forced into making that cut. Will he at least recognise that Conservatives have for many years been campaigning—I certainly have—to restore the link before 2012?
What I remember about the 1980s is the destruction of the manufacturing industry of the west midlands, the 3 million unemployed, the capping of local government's capital programmes, schools being left to decay through lack of repairs and the loss of council houses. The hon. Gentleman should therefore be very careful about who he lectures about the 1980s. It is always worth reminding Conservative Members exactly what happened then. If the hon. Gentleman still wants to talk about the 1980s, let us talk about 15 per cent. interest rates and negative equity.
Even more importantly, when Conservative Members get on their high horses about pensions issues and try to blame the Chancellor for present pensions problems, let me remind them—and particularly Mr. Stuart, who brought up the issue of the 1980s—about the mis-selling of pensions. I recall companies such as Rolls-Royce spending a lot of money trying to encourage people to leave SERPS and go into private pension schemes.
I certainly agree with my hon. Friend about that.
When we talk about the mis-selling of pensions and the present crisis, I believe that one of the best things that the Government have done is to introduce the pension protection scheme. It is one of the most fundamental things that the Government have done, whereas the previous Government presided over a pensions disaster. So when we look at what this Government have done for pensions, the pension protection scheme is well worth taking note of, because 120,000 people will be able to benefit from it to the tune of 80 to 90 per cent. of their pensions. Certain companies such as Rover could have been excluded, but they are now going to be included. When people want to talk about who did what in the '80s and '90s and probably into the new century, they should be careful about what they say.
I welcome the fact that we have one of the highest growth rates in Europe, no matter how people try to play with the figures. I also welcome the fact that there are more nurses and doctors now; although we have had difficulties in the health service, the situation is not as diabolical as the right hon. and learned Member for Rushcliffe tried to make out, because we can overcome the present problems. One of the problems in the health service is the change in the way in which finances are administered. We are going from an old culture to a new culture, which is payment by results. That will take time to feed through because we are changing from an old culture, which involved running deficits, to a new culture, where people get paid for what they buy. That is a fundamental difference and it will take time to come through. I welcome the fact that we have more schoolteachers than we have ever had, that they are better paid than they ever were, and that we have more new schools. We could go on all night about what the Government have or have not done, and other hon. Members have outlined the Government's achievements.
I will finish on a local issue in Coventry, where the Royal Mail is to move its sorting offices to Northampton. As Mr. Binley knows, I have nothing against him, but there is concern in Coventry about the quality of service that can be delivered from Northampton to Coventry, the times of postal deliveries and whether the 600 employees will keep their jobs. I do not think that the Royal Mail even has a site earmarked for a sorting office in Northampton. Conservative-controlled Coventry city council suddenly flipped its lid today, because it decided to support those Royal Mail workers, whereas it had been neutral.
I shall finish with this thought about what the Conservatives might do if they were to get back into power. Coventry city council has withdrawn the £3 a day payment to people who have disabilities and are doing jobs. That gives people a good idea of what we can expect after the May elections and, more importantly, what might happen if the Conservatives were to return to power.
It is a pleasure to follow Mr. Cunningham.
This is the last day of the last Budget of the present Chancellor. I was interested to note a few comments made in William Gladstone's first Budget speech on
"These are the proposals of the government. They may be approved, or they may be condemned, but I have at least this full and undoubting confidence, that it will on all hands be admitted, that we have not sought to evade the difficulties of our position—that we have not concealed those difficulties either from ourselves or from others; that we have not attempted to counteract them by narrow or flimsy expedients...While we have sought to do justice to the great labouring community of England by further extending their relief from indirect taxation".
Those are useful lessons from some time ago for the present Chancellor. I wonder whether the House is absolutely convinced that the present Chancellor has not used the "flimsy expedience" to which I have just referred and that he has managed to make an effective cut in indirect or, indeed, direct taxation on what William Gladstone called "the labouring classes", namely all of us now—perhaps not all of us, but most of us.
The Public Accounts Committee was founded four years after that speech, so we are celebrating our 150th anniversary this year. Even in those days, and I hope even more so now, people appreciated the importance of parliamentary audit of the public finances as a key component in driving out waste and ensuring economy and efficiency. Over the years, I have attempted to convince others of my personal mantra. Sometimes it has been a lonely battle, but I remain convinced of its truth: in a growing economy with modest and costed efficiency gains, which are achieved through proper parliamentary audit, it is possible to deliver better public services and sustained and real tax cuts. That is my personal mantra. In a few minutes, I shall show how we might deliver that.
For a couple of minutes, I want to leave our problems of affluence, as we are sometimes too self-regarding in this country, and focus on the problems of the poorest of the poor in Africa. I was reminded of that at a meeting here today at which I listened to Archbishop Ignatius Kaigama of Nigeria, who was talking about some of the problems that his country faces. The meeting was not that well attended—only three other colleagues were there—and was part of the Catholic Fund for Overseas Development's campaign, "Live simply so that others may simply live". We all applaud what the Chancellor has done conscientiously and correctly in the Budget to increase the amount of money that we, as one of the richest countries in the world, contribute to overseas development.
The archbishop was telling us about what happens to our money—that is where parliamentary audit is relevant, because the audit of public moneys in Nigeria is notoriously weak—when it gets to Nigeria. He spoke of £100 million a year of our taxpayers' money going to Nigeria. Despite Nigeria's being the sixth largest oil producer in the world, and despite the generous provision for help that, once again, we will make to it today, the poor in Nigeria are getting poorer. They are getting poorer even in the Niger delta—despite and often because of overseas aid—as a result of massive corruption, which is leading increasing numbers of people in this country to doubt the value of overseas aid. Rather than simply colluding with and congratulating the Chancellor on spending more on overseas aid, the Conservative party and others should put more pressure on him to ensure good civil governance, and that the money is properly spent.
To return to parliamentary scrutiny and public audit in this country, efficiency gains are increasingly the key element in our debates. I am proud that the Public Accounts Committee has tried to play a part in that, in its modest way, over the past few years. The Committee is surprised that further efficiency gains were claimed in the Budget so soon after the National Audit Office report mentioned by Dr. Cable. That impartial report by Parliament's auditors questioned the credibility of the figure previously claimed—the relatively modest figure of £13.3 billion. Therefore, if the Gershon claims are not in the bag, how credible is the Government's claim that they will have saved an additional £26 billion by 2011? How ambitious is even that claim given that, as we are repeatedly told, the public sector as a whole spends well over £550 billion?
May I give one bouquet to the Government, and particularly to the Chief Secretary? I went to see him last year with Mr. Williams and a delegation from our Committee, and we requested more transparency. On
"We discussed last year transparency in the programme. Departments already account for their programmes and progress in their regular departmental reporting cycle. Reflecting the Committee's suggestion, I have decided at this time to publish a consolidated breakdown of departmental performance across the three areas of the programme (efficiency gains, workforce reduction and relocation), and to break this down by workstream and cashable element."
I am grateful to the Chief Secretary, as we have got more transparency, which is important. If we are talking about £26 billion, let us think about what that could achieve.
Is my hon. Friend concerned that some of the Gershon programmes have impacted negatively on service quality? In particular, I am thinking of his Committee's report on the number of calls that went unanswered at the Department for Work and Pensions following the switch to call centres as part of the Gershon programme.
Yes, that is a problem; it relates to an issue to do with cashable and non-cashable gains. We could have an entire debate on that. We need to have a serious debate on the impact of some of the Gershon reforms on public sector efficiency. If I may give a brief advertisement, let me say that there will be a Public Accounts Committee debate in a couple of weeks' time at which we can talk further about this important point, and I am grateful to my hon. Friend for raising it in her intervention.
I was talking about the savings of £26 billion. That is an exciting promise—or promissory note—given to us by the Government. It could reduce the basic rate of income tax by up to 8p in the pound—a real reduction of 8p in the pound. Of course, the actual amount of that reduction would depend on the state of the economy at the time, but I offer that figure as a headline figure to show what could be achieved by efficiency gains—promised by this Government and audited by the Treasury. If we did not want to reduce income tax by 8p in the pound, we could build 860 schools or 130 hospitals, or use the money to reduce borrowing considerably. So that is an exciting claim.
Efficiency gains are an essential aspect of the debate. They are becoming increasingly important, and they are doubly important because we need to restore public trust in respect of what is happening to all the extra money that we have put into the public services. A recent King's Fund study—a reputable study—showed that of the £19 billion that we the taxpayers have put into health, £6.6 billion went on pay, £2.2 billion went on the rising costs of drugs, £1.6 billion went on hiring more doctors to comply with new European Union employment laws, £1.1 billion went on new buildings, £1 billion went on medical equipment and £600 million went on negligence law suits. It showed that of the £19 billion, only £5.9 billion went on
"direct improvements, which included reduced waiting lists, greater use of day surgery, larger numbers of doctors, nurses and consultants, and elderly patients spending far less time in hospital".
The debate has therefore changed, and it continues to change. We should be aware of that—I say that especially to my party. The public are becoming increasingly dubious about the claims of politicians that such large amounts of their own money are making a real difference. Indeed, we know that productivity in the NHS is declining.
I pay tribute to my right hon. and learned Friend Mr. Clarke—a former Chancellor—for making a brilliant speech. It was a dissection of the Budget which I shall not even attempt to emulate because there is no need to, as the case has been made so well by him, and also by my hon. Friend Mr. Osborne, the current shadow Chancellor. There is no need for me to repeat everything that has been said about matters such as the sleight of hand in the Budget—about the giving and the taking away.
We should however be aware of two aspects of the Budget which will make us aware of how the Budget is changing things. One of them is the Chancellor's apparent conversion to simplification by merging the tax and national insurance bands, for which I praise him. I accept that complications are also introduced in respect of tax credits, but simplification is the aim; that is the headline that the Chancellor wants the public to remember. The other key aspect of the Budget is the Chancellor's apparent conversion to cutting the base rate—and therefore to tax cuts.
That offers a challenge to Conservative Members. It will become increasingly difficult for the Government and the Chancellor now, in the next couple of years and up to the general election, to argue, as he has so successfully argued in the past, that tax cuts promised by an incoming Government will inevitably lead to worse public services. Such claims have been made to devastating effect in the past against my party. As a result of the Budget, they will be increasingly difficult to sustain.
Efficiency gains and growth can ensure better public services. We should be aware of that at all times. After all, as my right hon. and learned Friend the Member for Rushcliffe made clear in his speech, the Chancellor wants to increase spending by only 2 per cent. in real terms—by less than the inflation rate. Before I sit down, I want to make what might be considered a fairly radical suggestion—that we should limit increases in total public spending, once there is a new Conservative Government, to the rate of inflation. Even last year, that would have been considered a way- out, radical, right-wing suggestion, but it is one that the Chancellor himself has taken up. As well as limiting himself to only a 2 per cent. spending increase, he is promising at least 2 per cent. in efficiency gains.
So there is a challenge for us. There is a real possibility that the new Chancellor of the Exchequer, whoever it may be—whether it will be somebody sitting in the Chamber at the moment or someone else, we do not know; we can only speculate—will be able to deliver very substantial tax cuts before the next general election. It is therefore important that my party be aware of that, prepare the ground and not wait for the general election to make its own promises, when, as happened in the past, they can be immediately rubbished. We should have the moral and intellectual courage to make the case for the state's taking a lower share of people's valuable earnings.
As I said, public opinion is changing, and it is doing so because people are being taxed so much more. Because of the failure since 1997 to raise income tax thresholds in line with earnings, in excess of an additional 3 million people are paying income tax, and an additional 1 million are paying it at the higher rate. Whatever they might say to public opinion pollsters who stop them in the streets, and whatever focus groups might say about the apparent reluctance to trust politicians who offer tax cuts, those people are out there in very considerable numbers and paying more tax.
The rise in taxes in both relative and absolute terms, and the well documented increase in the system's complexity, has had a damaging impact on families, incomes, jobs and businesses. Let us look at household discretionary income. The amount that families earn after paying unavoidable expenses such as taxes and household bills has fallen by 10 per cent. Beneath the surface, public opinion is changing faster than we political cognoscenti sometimes acknowledge. As the Chancellor may have sensed, perhaps the public are more interested in political parties that promise to relieve their burden of extra taxes.
Members might dismiss my views as those of one Back Bencher—meaning that they have no influence and do not matter. Do not listen to me, even for a second; instead, look at what is happening in other parts of the world. Since 1996, the Conservative Government of John Howard has carried out a major reform of Australia's tax system. Its four income tax rates have been reduced from 20, 34, 43 and 47 per cent. to 15, 30, 40 and 45 per cent. respectively. Income tax thresholds have been increased considerably; indeed, the top rate threshold has trebled: it now starts at 150,000 Australian dollars, which is more than £60,000. So the results have been dramatic and show that in one country, at least, it is possible over time to combine falling interest rates, falling unemployment and falling tax rates with increased tax revenue, increased growth, increased Government spending, budget surpluses and the elimination of Government debt. If it is possible in that country, is it so unbelievable that it is possible in others?
If I heard the hon. Gentleman correctly, he suggested that the Australians have a top rate tax of 45 per cent., starting at £60,000. Is he recommending that for Britain?
It is impossible for me, sitting where I do, to give an absolute figure for what should be the starting point for paying top tax rates. Nobody can expect us Opposition Members to do that. I am saying that we should at least have an open mind on this issue, look at what is happening in other countries and realise that it is possible to make considerable progress on these fronts. If Members do not want to consider the example of Australia, which is a long way away, they should consider Ireland.
In 1987, Ireland's economic position was precarious. It had stagnant growth, high unemployment, spiralling deficits and the International Monetary Fund threatening to intervene in the Irish economy. That sounds familiar: it happened a long time ago in our country before the reforms under Lady Thatcher and John Major. Ireland's 1987 budget began a process of major economic reform, cutting spending drastically to bring the deficit under control. The next budget reduced current spending by 3 per cent. and capital spending by 16 per cent. Those spending reductions were accompanied and followed by major and continuing tax cuts. Among others, the standard rate of corporation tax was steadily reduced from 50 per cent. in 1987 to 12.5 per cent. in 2003—the lowest rate in the EU. Personal tax rates were steadily reduced from 35 per cent., 48 per cent. and 58 per cent. in 1987 to 20 per cent. and 42 per cent. in 2001.
One might think that that was dramatic, and if anyone suggested such cuts here they would be dismissed as out of touch with reality or as coming from a right-wing think-tank, or criticised by Matthew D'Ancona in The Sunday Telegraph. However, between 1987 and 2003, overall tax receipts in Ireland increased fourfold and corporation tax receipts increased 16-fold. That has allowed public expenditure to grow by 220 per cent., compared with a rise in the UK of 120 per cent. in the same period. I know that other factors were involved and we cannot entirely replicate what the Irish managed to achieve. Ireland, for example, has benefited unduly from receipts from the EU, but the fact is that the simple case is very interesting, and we should be aware of it.
The hon. Gentleman paints an interesting picture of alternative tax scenarios drawn from countries across the globe and across the Irish sea. He is known and recognised as one of the free, radical and independent thinkers of the Conservative party and it seems only a few months since that group was flirting with and promoting the virtues of a flat-rate tax. What is the present thinking on that in his party?
I am famously not in the loop, so I do not know. I was very heartened by what the shadow Chancellor said in his early days about the benefits of moving to a much simpler and flatter tax system. I agree with the shadow Chancellor that in a complex economy such as ours it is not feasible to do suddenly what the east Europeans did and move overnight to a flat rate of tax. It is a caricature of our position to suggest that that is what we advocated. The Chancellor presumably believes in a simpler tax system himself. Why otherwise would he have sought simplification in this Budget?
Why is it beyond the bounds of credibility to suggest that a Conservative Government, over the lifetime of a Parliament, could move to a much flatter, simpler tax system, as suggested by Lord Forsyth, in an excellent, well documented paper? It showed, incidentally, that £21 billion of tax cuts were entirely deliverable. Of course, there was an attempt to rubbish that paper, with the same old arguments. Ministers trotted out the tired arguments that Lord Forsyth's tax cuts would scythe a horrible hole through our public services, when in fact £21 billion is within the margin of error.
The point that my friend, Michael Forsyth, made to me on the phone when I was discussing flat taxes with him today—and I put it to my right hon. Friends on the Front Bench—is that unless one reduces the overall burden of taxation, it is difficult, indeed impossible, to achieve flatter and simpler taxes without creating a considerable number of losers. Therefore, we have to have the courage as a political party to start arguing the case for a lower overall burden of taxation, because that is the only way in which we can make progress towards a much flatter rate of tax.
I think that there is now an overwhelming case for change, and that the intellectual consensus is starting to change as a result of this Budget. People in all political parties are beginning to recognise that higher taxes are causing real hardships to families, and most of all to the poorest.
That is where the moral case for lower taxes comes in. Too many caricature the argument as one that is posed by people who have no interest in compassion and who want simpler and lower taxes only to help the rich. The truth is that higher taxes affect the poorest and most vulnerable members of society to the greatest extent, and that is unfair and immoral.
According to well-audited national statistics, the poorest 20 per cent. of households pay 36.4 per cent. of their gross income in direct and indirect taxes. That compares with 35.6 per cent. for the richest fifth, and 35.3 per cent. on average. The poorest people pay the highest tax—what a ludicrous situation! That is where we find ourselves after 10 years of a Labour Government, who I accept are composed of people who are entirely honourable and personally committed to reducing the burden on the poorest. What is going on?
I have set out the moral case for lower taxation. The PAC and other Select Committees have compiled numerous reports on the matter, and in his speech my right hon. and learned Friend the Member for Rushcliffe talked about the desperation that the poorest in our society face as they try to cope with overpayments in the tax credits system.
According to tables A3 and A4 in the Budget statement, people have to start paying income tax and national insurance when they earn only £5,225 a year. That is scarcely believable. Do not people in this House agree that that is a most extraordinary state of affairs?
In addition to the moral case for lower taxes, there is also a strong economic case, as I have tried to show with examples from around the world. A recent paper from the Organisation for Economic Co-operation and Development, speaking about the period between 1965 and 1995, concluded:
"Up to one third of the growth deceleration in the OECD would be explained by higher taxes."
Although the US is not very popular in this House, I shall mention it as another example, as a report from the American Shareholders Association says that
"the US tax cuts of 2003 have already paid for themselves by around 50 per cent."
I have set out the economic and moral case for tax cuts, and now I turn to the political case—the most important one for us politicians. I am constantly told that the public do not believe promises of tax cuts, that they have no appetite for them and that they want better public services. However, a recent ICM poll found that 71 per cent. of people believe that
"taxes have risen, we aren't getting value for money, and the people who suffer the most are the most vulnerable in society".
In addition, 59 per cent. of people believe that
"if Britain reformed public services and cut waste it could lower taxes without having to cut spending on vital services".
By contrast, the poll found that only 36 per cent. of people believe that
"lowering taxes would create damaging instability for the economy".
I have shown that there is a moral and an economic case for tax cuts, and I have spoken of the importance of audit. Like the Chancellor, however, I want to make one final statement before I sit down. It is a bit of a parlour game, but why should I not play it?
I want to make a suggestion about what we could do if the Conservative party were about to take on the ship of state and the shadow Chancellor were giving the Budget. It is so radical that the House will probably dismiss it instantly, but it does add up. I think that we should consider using the proceeds of growth to almost treble the tax-free allowance to £15,000, in today's prices, by the end of our first Parliament or over the next four years. In the process, we should abolish the starting rate of income tax.
That higher personal allowance would apply to all taxpayers, including pensioners, and it would benefit senior citizens as well as people of working age. Currently, people of working age can earn just over £5,000 a year before they pay tax, and for pensioners the figure is just over £7,5000. However, if those people were able to earn £15,000 before paying tax, that would constitute a major improvement in the quality of life for all taxpayers. It is difficult for non-experts—for MPs even—to cope with long Budget statements, but if the personal allowance was raised to £15,000, more than 13.5 million people would no longer have to pay any income tax at all. That is more than the number of people who voted for Labour in the 2005 or 2001 general elections. [ Interruption. ] I agree—I am not the Chancellor, I do not have all the books, and I am not suggesting that we should do all of that now. I am just saying that hon. Members can use the Treasury model and work it out for themselves—it is doable. If the personal allowance was raised, it would automatically raise the threshold at which people start to pay top-rate income tax. People start to pay the 40 per cent. rate when they earn just under £40,000, but raising the personal allowance to £15,000 in today's prices and abolishing the starting rate of income tax would mean that people could earn more than £47,000 in today's prices.
That is just one example, but it is realistically achievable over a Government's lifetime if we take into account economic growth and efficiency gains. However, important choices have to be made, and that is where the pain—the slight pain—comes into my Budget statement. In recent years, the government sector has enjoyed record spending increases, which were mentioned by my right hon. and learned Friend the Member for Rushcliffe. Since 2000, the share of the economy taken up by the state has increased by 7.8 percentage points of GDP, which is faster than for any other country in the Organisation for Economic Co-operation and Development. The Government are literally awash with money—and borrowed money, to be paid for by taxpayers now and in future.
The expansion of government has gone far enough. We are suffering too much as taxpayers, and we should therefore consider limiting the annual growth of overall Government spending to inflation over the lifetime of the next Conservative Government. That is affordable and doable, and I commend it to the House. I do not think that it is going to happen, but I believe it very strongly. Before I conclude, I can only say that I stand by the words of Martin Luther:
"Here I stand. I can do no other. God help me."