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4.52 pm

Dr. Vincent Cable (Twickenham): After five years, we know the Chancellor's style of Budget-giving. His Budgets are always delivered with great flair, eloquence and style. There is a lot of good news and the first impressions are always very good. It is only after looking at the small print that we begin to see the problems.

I want to try to strike a balance between the good news, which the Budget undoubtedly contained, and some of the negatives. The Budget contained important themes that Liberal Democrat Members have already acknowledged. We strongly support the increase in tax finance for the NHS, and we stick by that. We support the principle, which the Government have belatedly acknowledged, that personal taxation has to rise to some degree to pay for that. The Budget contained what is effectively a 1p rise in income tax, although the measure is not called that, and we have endorsed that.

It is also important to acknowledge that probably the most important single determinant of business behaviour is the overall macro-economic climate, and that is very good. There is low inflation and unemployment, and that is at least partly attributable to good monetary and fiscal stability. All that is good news, and we acknowledge it.

There was, however, major sleight of hand in the Budget. As soon as most of us opened the Red Book and saw the first big table, it was apparent where the money

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was coming from. Of the £6 billion net increase in taxation, approximately £4 billion comes from business, almost all in the employers' national insurance charge. We need to be clear about what that tax is. It is not a tax on business men and women; it is not a tax on profits; it is not a tax on shareholders; and it is not a tax on wealth. It is a tax specifically on business costs and labour costs. It is a very bad and damaging tax that will have far-reaching consequences.

I have the luxury that the Conservative spokesman does not have of being able to suggest an alternative way of funding the Government's proposals. We suggested explicitly that the Government could have raised an equivalent amount of taxation by increasing the marginal rate of tax for people who earn more than £100,000 a year to 50 per cent. That, of course, would have taxed not merely salary incomes but investment incomes, which this Budget has not touched. I would be interested to hear why Labour Back Benchers regard that as inferior to taxing labour costs, which is essentially what this Budget entails.

The reaction to the Budget in the popular press and Parliament has been something of a phoney war. The argument has been that, through the Budget, the Government are taxing middle-income middle England. In some ways, I am reminded of a professional wrestling match in which one fighter gives the impression of a vicious kick at the head of his opponent, who pretends to writhe in agony on the ground—in practice, it has not happened. The Government have not launched a lethal blow to middle-income taxpayers, let alone upper-income taxpayers. They have launched a very severe tax burden on business costs.

It is important to think through logically what will happen. What are the effects of an increase in employers' national insurance contributions? Enterprises in the south-east of England that operate in a buoyant economy and do not compete internationally—most of the service trade—will pass on national insurance costs in higher prices, because they can shift the burden. In the overall economy, that will mean that prices will be a little higher than they would otherwise be. Consequently, when the Bank of England considers the inflation outlook, it will be less likely to cut interest rates and more likely to raise them, thereby making the problems of the exchange rate and the manufacturing sector worse than they would otherwise be. That is a very indirect consequence.

The most damaging consequence will be for manufacturing industry, because it operates in a traded environment with narrow margins and fierce price competition. Employers in the sector cannot pass on higher labour costs to their consumers: they have to absorb them, and they can do that in one of two ways. They can cut wages, so that a pay increase of 4 per cent. would become one of 3 per cent., resulting in lower real wages for their employees. Alternatively, and this is the more likely consequence, they can absorb them through higher redundancies. The main direct consequence of the Budget is that the increased tax on jobs, will cause higher rates of job displacement or job losses in the traded part of the economy—manufacturing—than would otherwise have been the case. That is the palpable conclusion.

Mr. Iain Luke (Dundee, East): Will the hon. Gentleman take into account the growth in the economy predicted by the Chancellor? Instead of a shrinking

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economy, in which such labour costs will have an impact, we will have an expanding economy, in which they can be contained by increased growth.

Dr. Cable: The logic is exactly the opposite. By making business less profitable and increasing its costs, the growth will be less than the Government have anticipated. One of the other sleights of hand in the Budget—to which I had not intended to refer, but the hon. Gentleman has prompted me—is the Government's assumption of a growth rate 0.5 per cent. higher than was otherwise the case. Much of the Budget arithmetic hinges on that very optimistic assumption. If one of the consequences of increasing taxation on business is to reduce investment and expansion of output in industry, it will wholly undermine the arithmetic on which the Budget is based.

Mr. Bill Tynan (Hamilton, South): Does the hon. Gentleman accept that, last year, according to the Confederation of British Industry report, £11 billion was lost through days of sickness? Does he agree that improving the health service will dramatically reduce that burden on business, and that it could be a benefit to business if we succeed?

Dr. Cable: Of course we favour a better NHS and more health spending, as I made clear at the beginning of my speech. We entirely support that and have made suggestions about how it should be financed.

I sense from several interventions by Labour Members that they do not appreciate the fact that business already makes substantial direct contributions to the cost of funding public services, including the NHS. In international terms, there is already a relatively high national insurance charge on employers, who pay mandatory and voluntary sickness benefit. The business sector already makes a substantial contribution to the costs described by the hon. Member for Hamilton, South (Mr. Tynan). The Budget will have perverse consequences if it undermines the economy, creates more unemployment and weakens economic growth, which is why business groups have been critical of it.

I know that some hon. Members wince at the mention of the Confederation of British Industry, but in many respects it has been supportive of, and complimentary about, the Government. The old days when the CBI supported the Tories and the Trades Union Congress supported the Labour party are long gone. In many ways, the CBI has been indulgent of the Government; its anger on this occasion is genuine and, importantly, has been echoed by small business groups such as the Federation of Small Businesses. Two thirds of the increased revenue from the employers' national insurance charge will come from the small business sector and the self-employed, to whom reference has already been made. This is not a tax on big business, but very much a tax on small business.

The taxation on business does not involve only employers' national insurance charges, although they are by far the most important component. There are two more elements, one of which has been mentioned: taxation of the oil industry. My hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) knows much more about that than I do and I hope that, if he

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catches your eye, Mr. Deputy Speaker, he will talk about it. However, I worked for some years in the oil industry, so I know something of the complexity of the problem.

The fundamental issue about oil taxation is that when oil prices are high—they are relatively high at the moment—the oil industry earns excess profit—that is, economic rent. It is reasonable that some of that excess profit in periods of high prices should go to the Exchequer; anybody in the oil or mining industry accepts that principle. However, how can that be accomplished sensibly to maintain incentives for new investment and exploration? The system should be transparent, clear and up front. When a retrospective windfall tax is imposed on the oil industry, incentives are damaged. If the industry knows in advance that it has to pay a percentage of its excess profits to the Treasury, it can factor that into its investment calculations. When decisions such as the one to impose a tax are made, they only undermine confidence in the country.

I trust that the Department of Trade and Industry is now looking in detail at the final element of oil taxation. My understanding is that the new tax applies to existing fields, which are relatively high-cost in that the oil industry has to invest substantially, both in new technology and to get the oil out. We need to study the small print, but the tax may seriously undermine efforts to increase yields from declining fields in the North sea. The Government may unthinkingly have done quite a lot of damage to the economics of the North sea. I am sure that we shall hear more about that in Committee.

The other big tax change affecting the economy which has not been mentioned is the tax on foreign investments in branches of foreign companies. The measure is complex but, particularly in the banking sector, it is a major disincentive to inward investment. In the past year, there has been quite a lot of evidence that inward investment in the United Kingdom is slowing relative to that in other countries. There are many reasons for that. It may have something to do with the euro area, or other factors may be involved, but it is certainly happening and the tax will not help.

Germane to the argument about foreign investment is the relative level of tax in this country compared with that in other countries. For some years, the Government have been buoyed by the idea that Britain is highly business-friendly, but taxes have been imposed on the business sector when countries such as Germany are beginning to realise the disadvantages of a high-tax environment. If one adds together all the different business taxes as a share of gross domestic product, the burden in the UK is now higher than it is in Germany, let alone the United States. More and more companies will begin to take that factor into consideration when they make investment decisions.

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