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Lord Henley: My Lords, I totally disagree with the noble Lord. He is incorrect in making such assertions. We believed that in a broadly-based taxed system it was right to go ahead with the second stage of VAT on fuel, not least because we were offering the appropriate protection to the various vulnerable groups. Obviously, others thought otherwise and therefore, having lost the vote, my right honourable friend said that he would not go ahead with the increase. However, unlike the noble Lord, Lord Peston, and, I suspect, the noble Lord, Lord Marsh, my right honourable friend considers £1 billion to be a fairly significant sum. That hole had to be plugged and that is why my right honourable friend came forward with the proposals that I announced in the Statement.

Lord Stoddart of Swindon: My Lords, my noble friend said that he wished to help the Government. I assure the Government that the only way in which I wish to help them is out of office, and the sooner that that happens the better things will be for this country and its taxpayers. I must say to my noble friend that if he expects the Government to listen to him, he is living in cloud cuckoo land. They do not even listen to the chairman and vice-chairman of the Tory Party. I understand that the chairman advised the Government that the introduction of the further 9.5 per cent. VAT on fuel would amount almost to political suicide. However, the Government went ahead which was, as the noble Lord, Lord Marsh, said, an act of sheer stupidity. Unfortunately, the country is having to reap the whirlwind of the seeds that the Government have sown.

Now the people are faced with a double whammy. First, their taxes are being increased and, secondly, perhaps as a matter of revenge, interest rates are being increased. Let us think about that and understand that, although the Government say that they are in favour of the family, the Budget has hit married couples. There has been a reduction in the married man's allowance and home buyers will be hit a second time by the increase in interest rates. It is all completely unnecessary.

Will the Minister confirm that this year taxation will increase by £26.4 million? Will he also confirm that, if the Chancellor increased the higher tax rate and adopted the measures that were put forward by my noble friend, he would not have to increase the cost of living and put burdens on those in our community who are already worse off?

Lord Henley: My Lords, I agree with the noble Lord in one small particular. He was correct in saying that his noble friend is living in cloud cuckoo land. I totally and utterly reject his allegation that interest rates were increased out of revenge against—I am not sure against

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whom it was supposed to be. Interest rates were increased for the reasons that I gave and not out of revenge.

I cannot confirm the noble Lord's figures about the increase in taxes. I am grateful to him for pointing to the right page in the Red Book. He knows perfectly well that taxes had to be increased in order to reduce the amount of borrowing. The noble Lord and, for all I know, his party are wedded to the idea of borrowing, borrowing, borrowing. However, that is not the way out. In the end, the gap had to be narrowed and there are two ways of doing that; the first is by having firm control of public expenditure, which we have; and the second is by increasing taxes.

Lord Aldington: My Lords, I too ask the Government—my noble friend the Leader of the House is in his place—to consider an early debate on this matter. I do so not necessarily for the reason given by my noble friend Lord Boyd-Carpenter but because some of us believe that the Government were right about the Budget, right about the interest rate and right about the proposals that they have brought forward today. One would not obtain that impression from listening to these questions.

Lord Henley: My Lords, I can only say that I am very, very grateful to my noble friend for making the point that the Government were right, although misguided people on the other side in the other place voted against certain parts of the Budget. I am sure that my noble friend the Leader of the House will have noted what my noble friend Lord Aldington said; namely, that it might be appropriate for us to have an early debate so that we can make the Government's case loud and clear and can demonstrate that this was a good Budget sadly led astray by others.

Lord Barnett: My Lords, I wonder whether the Minister has read the Government's Red Book. I am glad that he has it with him. Perhaps he will look at paragraph 4.32 of it. It is true that £1 billion is quite a lot of money, but to pretend that you can carry out a Budget with that degree of accuracy is, frankly, misleading.

As we see from the paragraph to which I have referred, the plain fact is that there is an estimated £10.5 billion margin of error in the public sector borrowing requirement. Therefore, is not the real mistake that the Government believed their own Whips and that they could get through the increase in VAT to 17.5 per cent.? They should have asked the Whips whether they can count properly because they obviously counted wrongly. For factual reasons, apart from how damaging it would be to ordinary people, as we have heard, they should not have proposed such an increase. Why on earth did they go ahead with that proposal, given the huge margin of error, when they did not need to?

Lord Henley: My Lords, I am reminded of the saying, "A billion here, a billion there and pretty soon you are spending serious money". I do not agree with the noble Lord. There was a gap there. I accept that there are margins of error; but if one takes out £1 billion, which in effect is what has happened as a result of the

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vote, it is quite right that the Chancellor should try to put it back and that is what he has tried to do in a manner which is the least damaging possible.

Lord Clark of Kempston: My Lords, does my noble friend not agree that it is essential in running a sound economy to keep control of the public sector borrowing requirement? I hope that my noble friend will agree that my right honourable friend could have increased the public sector borrowing requirement by £1 billion and that would probably have gone through unnoticed. On the other hand, he could have robbed the contingency reserve fund of £1 billion and not increased taxes. But in taking the decision that public sector borrowing is so essential, I believe that my right honourable friend has done the courageous thing and has increased taxation in order to make up that loss of £1 billion. Does my noble friend agree with me that that is a sounder way of running the economy rather than running into debt?

Lord Henley: My Lords, I agree totally with my noble friend. I am sure that he will understand when I say that it is unlikely that noble Lords opposite will agree with my noble friend and me on this matter. As he suggests, they would either have borrowed more or raided this fund or that fund. However, the sensible approach is that adopted by my right honourable friend the Chancellor of the Exchequer.

Lord Howell: My Lords, perhaps I may refer to the reference that was made in the Statement to public expenditure in the year 1996-97? Perhaps I may draw attention to the very serious situation which is affecting most local authorities, whatever their political complexion. They are now finding the greatest difficulty in financing education, housing and social services, which are the services that really affect people living in desperate conditions. Therefore, perhaps I may put in a plea in advance that if the Government are to look again at reducing the public sector borrowing requirement, which I understand, that they take into account the very real difficulties now affecting local authorities and therefore affecting many millions of deserving people in this country.

Lord Henley: My Lords, as my right honourable friend the Chancellor of the Exchequer made quite clear in the Statement, we are committed where possible to keeping down public expenditure. We have a very good record in that regard. But he made it quite clear also that we are committed to providing essential services. That is why he cited just two examples: there has been increased provision for both the police and the National Health Service. I am sure that my right honourable friend will note what the noble Lord has said about anxieties in relation to local authorities. But all parts of government, in one form or another, will be subject to some constraints while we remain committed to providing all essential services.

Lord Skidelsky: My Lords, does my noble friend agree with me that the Chancellor was committed to the VAT increase on fuel by his predecessor and had he not made an attempt to fulfil that commitment, the very same people who now condemn him for stupidity and arrogance would be the first to condemn him for

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weakness and breaking promises? Failure to attempt to fulfil that commitment would also have had a very damaging effect on the credibility of the Government.

Lord Henley: My Lords, my noble friend is quite correct. Another place had voted on that matter. That VAT increase had been voted through, I believe, on four occasions.

Lord Bruce of Donington: My Lords, many of your Lordships will be rather puzzled by the noble Lord's insistence that £200 million or £300 million are extremely important. I was very struck by that remark because it seems a little odd in view of the fact that the Government had a suicide pact on the necessity for increasing public expenditure to £3.5 billion per annum to be paid out to the European Community. A three-line Whip was put on that vote to increase public expenditure, and indeed it became a vote of confidence. Surely there must be a sense of proportion somewhere. Why do not the Government consider giving a complete rethink to this whole matter, rather than leaving it to a lot of technicians within the Treasury whose errors in the past have been so astronomical that even the Government themselves have found it necessary to reduce their number?

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