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Commissioner for Complaints (Northern Ireland) Order 1996

Baroness Denton of Wakefield: My Lords, I beg to move.

Moved, That the draft order laid before the House on 25th March be approved.--(Baroness Denton of Wakefield.)

On Question, Motion agreed to.

Finance Bill

11.21 a.m.

The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish): My Lords, I beg to move that this Bill be now read a second time.

I am pleased that we have an opportunity today to discuss the 1996 Finance Bill and I look forward to an interesting debate. The Bill, which has already been debated in another place, implements the 1995 Budget, which was designed to further the Government's overall economic policy. That policy is aimed at sustained economic growth, increased employment, and rising living standards based on sound public finances and low inflation. As well as the headline measures of the 1995 Budget, the Bill before us also continues the important work of preventing the growth of tax avoidance and closing loopholes.

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The 1995 Budget was delivered against a background of strong economic fundamentals. This was no accident. The Government have had to make a number of difficult decisions on both tax and spending over the past three years. But being in government is about having to make hard decisions and sticking to one's principles. As a result of the decisions taken, this Government are now able to build on the hard-earned gains that have been made. The Budget cuts taxes to leave people with more of what they earn and save. At the same time the Government have demonstrated their willingness to spend more on the public services that people care about while keeping a firm control of public spending generally. Taken together, the tax and spending measures in the 1995 Budget keep Britain on course to be the enterprise centre of Europe.

The Government's tight control of public spending has significantly improved the public finances of the country. The last three years have seen public spending plans reduced by £53 billion. It is because of the progress that has been made in this area that it has been possible to allocate more resources to priorities that the Government and the public are agreed upon. In 1996-97 there will be £878 million more for schools, £1.3 billion extra current spending for the NHS and resources for 5,000 extra police. Although the Budget reduces planned spending overall by £3¼ billion, greater use of private finance will improve the efficiency and value for money of investment in public services. We are aiming to get the share of national income taken up by public spending below 40 per cent. of GDP. The signs are there for all to see that we are on our way to meet this target by 1997-98.

I now turn to the Bill. It will not have escaped your Lordships' attention that we have a long Bill before us today. However, when looking at the Bill's length one needs to remember that as a result of a deliberate attempt to make parts of the legislation self-contained and easier to use it is sometimes necessary for the legislation to be longer in places. It should also not be lost on the Opposition that two significant deregulatory and simplifying measures account for a large proportion of the Bill. The measures on corporate debt represent a major reform and simplification, and the self-assessment measures contained in the Bill represent the final part of a major change. The Bill also contains the legislation that is needed to introduce a new tax to help the environment (the landfill tax). This new tax will provide incentives to produce less waste, recycle and re-use more waste and send less to landfill. It has been widely welcomed. I am sure the House will appreciate that any new tax will inevitably involve a considerable number of pages of legislation to ensure that all aspects of the tax are covered.

I now turn to the detail of the Bill and begin with those clauses covering indirect taxation. Clause 1 of the Bill introduces a measure that has been welcomed up and down the country. It cuts the duty on spirits by 4 per cent. (equivalent to 27 pence a bottle) and helps maintain the domestic base of one of our most important export industries. There is no doubt that this measure has lifted spirits far and wide, but just as importantly, it will go some way towards assisting the economy and

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the employment situation in Scotland. Clause 2 has also been welcomed by those who prefer a glass of wine in that it reduces duty rates on wine or made wine of a strength exceeding 22 per cent.

Clause 4 increases the duty on petrol and diesel by approximately 5 per cent. above inflation, in line with the Government's November 1993 commitment. This measure continues to encourage fuel efficiency while helping to control harmful emissions. Many environmentalists continue to argue for greater increases in these duties. I believe there is a reasonable balance in the proposals that the Government brought forward in 1993 and are enacting for this year by means of Clause 4.

Clause 9 increases the duty on tobacco in line with the commitment given in November 1993 and further demonstrates the Government's commitment to using taxation as a means of encouraging further reductions in smoking. The duty on hand rolling tobacco was frozen, however--a positive response alongside Customs and Excise's excise verification work in combating a particular focus for smuggling.

Clauses 10 and 11 concern betting duties. Much has been said about the impact the National Lottery has had on the bookmaking, pools and racing industries. The Government have listened to the concerns that have been raised and have acted. General betting duty has been cut by 1 per cent. with the cut being shared by the punter and the racing industries. Pools betting duty was cut by 5 per cent. with a further 1 per cent. cut being passed on to the Football Trust and the Foundation for Sport and the Arts.

Clause 14 increases the rates of vehicle excise duty on cars, taxis and light goods vehicles. The increase is broadly in line with inflation and it is worth making the point that car vehicle excise duty is still lower in real terms than 10 years ago. Clause 18 introduces measures to exempt vehicles over 25 years of age from paying VED. This measure has been well received by many, including the vehicle preservation movement, and recognises the important part that vintage, veteran and classic vehicles play in our heritage.

Clauses 25 to 38 cover the various VAT measures in the Bill. The Government have looked at deregulation and reducing the real burdens on businesses. We have shown our commitment to business in the past and will continue to do so. We now have the highest VAT threshold in Europe and as a result have taken many small businesses out of VAT altogether. The changes to the second VAT directive will remove uncertainty in a number of areas and should make it easier to administer. Clause 26 will specifically provide a VAT-free trading environment for certain specified EC commodities, including some metals, foodstuffs and chemicals. We have also made changes to the VAT payment on account (POA) scheme, which requires the largest VAT payers with a liability in excess of £2 million to make two monthly interim payments of their VAT liability each quarter. These interim payments will be halved, which will improve businesses' cash flow, and businesses will also be given the option to pay the actual monthly

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liability rather than the preset amounts if that suits their circumstances better, which will contribute to improving the cash flow of larger businesses.

Earlier I mentioned the Government's determination to counter avoidance. As I conclude my brief remarks on the VAT measures in this Bill, perhaps I should draw your Lordships' attention to Clause 31, "Groups: anti-avoidance". It had become apparent that there was a willingness on the part of a minority of users to manipulate the grouping rules in the furtherance of VAT avoidance schemes. With that in mind we have increased the discretionary powers available to the commissioners of Customs and Excise for determining the operation of the grouping rules. This measure will provide a comprehensive and flexible counter to the serious threat from avoidance in this area. Grouping is a massive deregulatory facility which the Government are anxious to preserve. Properly used, the facility puts businesses operating as a number of individual companies on the same footing as single companies organised on divisional lines. That saves groups some £400 million in VAT a year which they would otherwise have to suffer, as well as reducing accounting costs considerably. The measures are not designed to recoup any part of this acceptable loss. Rather they are designed to halt the growth in avoidance schemes which rely on manipulation of the facility to secure advantages well beyond those intended. Unless such deliberate avoidance is tackled effectively the future of grouping could be jeopardised.

Clauses 39 to 71 introduce measures related to the new landfill tax. Back in the 1994 Budget, we announced that this important new tax would be introduced. Full and wide consultation has taken place and I am pleased to note that the new tax has been well received. We believe the new tax will contribute to the protection of our environment by encouraging waste producers to produce less waste, to recover more value from waste (for example, through recycling or composting) and to use more environmentally friendly methods of waste disposal. I am sure noble Lords will welcome these measures as they not only have a positive effect on the environment but also have a positive effect on the tax on employment, as a result of the decision to use the revenue raised from landfill tax to reduce employers' national insurance contributions from April next year.

I turn now to direct taxation. Clause 72 sees us return to our tax-cutting agenda by reducing the basic rate of income tax from 25 per cent. to 24 per cent. It also allows for the lower rate band to be increased by £700 to £3,900, which is £500 more than required by indexation, and for the basic rate limit to be increased by £1,200 to £25,500, which is over indexation by £200. Clause 73 reduces the tax charge on savings income from the basic rate to the lower rate of 20 per cent. Clause 74 increases personal allowances allowing all taxpayers to gain. When one considers some of the measures that I have just mentioned, it will be clear for all to see that they take us closer to our goal of a 20 per cent. basic rate and clearly demonstrate our determination to allow people to keep more of what they earn and save. That point is further reinforced when one considers that since 1979 this Government

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have continually lowered income tax rates. That has continued to such an extent that we now have the lowest basic rate of tax for over 50 years.

Clauses 77 and 78 of the Bill set the main and small companies' rate of corporation tax at 33 per cent. and 24 per cent., respectively.

Clauses 80 to 105 cover the measures in this Bill which relate to the taxation of corporate debt. The measures are a major simplification, bringing the tax treatment of all corporate debt from bank loans to complex instruments in line with accounting practice. The measures will make paperwork easier and cheaper for firms and it is no surprise to learn that the reforms that we are putting in place have been widely welcomed. Your Lordships will no doubt be aware that the Government made a number of amendments in this area during the Standing Committee stages in the other place. As a responsible Government we are always prepared to listen. We sought to address all the major points made in representations on the detail of the proposals.

Clauses 111 to 120 contain a package of measures to stimulate the use of share schemes for more junior management and lower paid employees. We see these measures as important in encouraging direct employee participation in their businesses through wider employee share ownership.

Clauses 121 to 142 contain the final tranche of legislation required for the introduction of self-assessment. The provisions contained in this area have been developed with the help of extensive consultations and the tax return has been trialed by real taxpayers. We believe that self-assessment will introduce a clearer and more streamlined system, making it easier for taxpayers to understand their liabilities, with one tax return covering all aspects of a person's tax affairs for the year; one tax bill for the year; and one set of dates for paying tax. We also believe that it will bring major savings for the self-employed, with annual compliance cost savings of up to £250 million, once the new system has bedded in.

This year's Bill contains three main provisions on inheritance tax. Clause 183 raises the inheritance tax threshold to £200,000--£40,000 more than required by indexation. That change safeguards the hard earned wealth of ordinary families and will mean that only one in 45 deaths will lead to an IHT bill for heirs. This particular measure also marks another important step towards the Prime Minister's long-term aim to abolish inheritance tax.

Clause 184 gives a further boost to investment in unquoted, often small and growing family companies, by extending 100 per cent. business relief to all unquoted shares in qualifying companies, regardless of the size of the holding. Clause 185 improves the IHT relief for agricultural assets.

Finally, Clauses 186 to 196 contain measures to adapt the present rules for stamp duty and stamp duty reserve tax on share transfers to cater for the introduction of paperless share transfers.

I believe that this Bill contributes to helping people keep more of what they earn and save by reducing the basic rate of income tax to 24 per cent., widening the

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lower rate band by some £700 and cutting the tax on income from savings to 20 per cent. for basic rate taxpayers; to protecting family savings by increasing the inheritance tax threshold to £200,000; and to continuing to reinforce Britain's status as the enterprise centre of Europe by having a tax system that encourages wealth creation and keeps business taxes and employment costs low.

This Bill implements many important parts of the Budget--a Budget that was designed to build on the foundations already in place for sustainable growth, low inflation and higher living standards for all; a Budget designed to promote sustained economic growth and increased employment and ensure that the economic fundamentals of sound public finances and low inflation remain in place. I commend it to your Lordships.

Moved, That the Bill be now read a second time.--(Lord Mackay of Ardbrecknish.)

11.38 a.m.

Lord Bruce of Donington: My Lords, the House will be grateful for the rather subdued speech of the noble Lord, Lord Mackay, this morning. He has plenty to be subdued about. In the course of his remarks, he did not refer to the fact that when the Finance Bill went to the other place it was 406 pages long but when it emerged from there and came to this House it contained 461 pages. I doubt whether even the most thorough examination advocated in this place by the noble Lord, Lord Boyd-Carpenter, who is an expert in these matters, would have enabled the Bill to have passed through the House with the degree of expedition that is normally required on a reasonable reading of standing orders. However, it is a Bill.

I do not want to depress the noble Lord too much. What I have to say this morning will, I hope, be full of cheerfulness. But I observe that he did not find it wise to refer to the recent court judgment, which looks as though it will make a substantial impact on the Treasury in respect of refunds due on VAT to companies that have been engaged in what are called "interest-free sales transactions". The press puts the figure at £5 billion. I do not want to comment on that; I certainly would not invite the noble Lord to be more particular. But my guess would be somewhere between £2 billion and £3 billion. At any rate, it is interesting to find that the Government's attention to VAT is likely to be more detailed in the future.

When the Government approach the country on the question of taxation in the most self-congratulatory terms, normally they mean income tax. That is the only tax that really concerns them. They always ignore the fact that the amount of VAT levied has roughly doubled since they took office and is a great burden on the bulk of the population.

The noble Lord rests the Bill on the Government's economic expectations and performance, the statistical detail of which I am sure my noble friend Lord Eatwell, when he winds up the debate, will deal with far more adequately than I can ever do. But, according to the noble Lord, Lord Mackay, the benefits that we now have are a result of sound money and sound administration.

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We are now approaching the sunny uplands. What the Government have not dealt with so far is the question of unemployment.

Unemployment remains the greatest problem that the country faces. We are a talented nation. In our island's history we have excelled in the fields of exploration and science, both theoretical, abstract and applied. We have a great history in engineering and in administration, not only in our country but in the territories that we once held in the Empire. There is enormous artistic talent within the country and an enormous sense of citizenship. We are well blessed with the people that we have in the United Kingdom. They are one of our greatest assets. They have enabled us progressively--sometimes a little violently, but not much--to make fair progress in ameliorating suffering, not only among our own people but for other peoples of the world. They have enabled us to make great advances in medicine and in other fields. Our inventors are probably second to none.

We therefore have substantial assets in our country--the people. We have a reasonable climate within which to operate. We are not without our natural minerals either and, according to my late right honourable friend Aneurin Bevan (to what effect I do not know), we are surrounded by fish--though that may be subject to query at the present time.

We have enormous assets in the United Kingdom, and I do not like those who decry their own people or minimise their importance. They are the most precious and the greatest jewels in the crown that we hold. In wartime we freely acknowledged that fact. Suddenly, those working in the coalfields, on the land or in the factories, instead of being classed as "hands for hire" or "hands wanted", became elevated to the saviours of the country, as indeed they were in the years of the war from 1939 to 1945. Then, anybody who dreamt of casting aspersions upon the working population of our country would have been howled out of town.

Those were the days of the working man, the ordinary person of Britain who worked extremely hard in order to secure our victory, as indeed did noble Lords here. We did not hear then of shedding labour. We heard of people whose efforts, not only on the battlefield, on the sea or in the air but in the factories, were held in high esteem. They even had works councils in various factories on very much the same lines, though much more comprehensive, as those envisaged in the social chapter, which is so much denounced. In fact, joint works councils and joint consultation were instituted throughout the war industries and our war industries would not have prospered as much as they did without them.

So there we have another precious asset. What are we doing with it? In 1945 and even before, and for some 20 years afterwards, the rate of tolerable unemployment never exceeded 3 per cent. If it went much above 2.5 per cent. there was an unholy row and unease throughout the country. Now the acceptable figure is apparently between 5 per cent. and 6 per cent. That will not do.

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It is not as though the Government themselves are devoid of sensibilities. In many ways they are devoid of any fundamental philosophy other than that which was enshrined--though it is slowly disappearing--in the doctrine enunciated by the noble Baroness, Lady Thatcher, when it was every man for himself and there was no such thing as society. That divided our society and that thinking is something that we now have to abolish. We must get back to a reasonable co-operation, not only among the ordinary working people themselves in the factories but also between them and management.

Much has been said about the social chapter. I regard it as an irrelevance because it was used by the Government in another place to scare their supporters into accepting Maastricht. It was used by my party largely to get our Members to lobby against its abolition in order to gain support from them for Maastricht as well. That is why there was unanimity. When my party comes to power shortly, it will no doubt produce its own domestic legislation which will be in far less ambiguous terms than the social chapter. If we win the election, we will provide a social chapter and we will not have to bother Europe at all.

When the Government get into any kind of difficulty, they do not think. Many of their Ministers do not have time to think. I have touched on this point on a number of occasions when I have had the privilege to address your Lordships' House. The day is only 24 hours long; there is a certain amount of time for sleeping, eating, doing one's toilet and all the rest of it and interviewing people. The time for thinking and for reading is very small. So the Government have been tempted over the years whenever they are in difficulties to go to consultants. They have gone consultant mad. They spend around £500 million a year on consultants when they ought to be able to make up their own minds on principle.

They also run to economists, of whom I am sorry to say I do not hold a very high opinion. That is a general professional observation very often made by accountants in regard to their colleagues, who are the economists. They operate on the basis of certain econometrical assumptions which are fed into a computer and produce a whole number of equations and a whole number of answers according to whichever model they adopt, forgetting of course that by the time the result has come out of the computer the facts that were put in have already become obsolete.

Economists assume that people behave reasonably. My Lords, they do not. Economists assume that people operate on certain standard assumptions. They do not. In many cases it depends on what side of the bed they get out of in the morning. If a person is in control of a very large company, that can have quite considerable effects not only upon the company but on the economy at large. Economists also tend to assume--I would not dream of associating my noble friend on the Front Bench with this observation--that they do not have to make allowances for the size and scope of enterprises.

According to a Written Answer given in another place (at col. 704 of Hansard of 14th March) there are some 3.5 million enterprises in the United Kingdom, of which

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2.5 million have no employees at all. They are one-man businesses. Those are joined by 790,000 which do not employ any more than nine people and 107,000 which employ between nine and 20 people. What we find is that there are only 8,000 firms which employ more than 200 people--0.2 per cent. of the total number of enterprises. There are just 8,000 enterprises with between 100 and 199 employees.

The larger firms are almost impervious to the actions of government. The Government can fulminate about employment and wage rates and about the necessity for keeping wages down and within controlled limits. But the top firms ignore that altogether. They plan two years ahead. They not only plan their price structure two years ahead; they plan even their wage rates two years ahead and the publicity expenditure to get the turnover that they want. They largely ignore the Government, apart from occasionally giving them party subscriptions because they like the smiles on their faces. So parts of the economy take a long-term view and other parts take a short-term view. It is very difficult to find out which, so it is very difficult to predict the course of the economy.

The unfortunate point is this--at the moment both political parties, or perhaps I should say all three, are completely united in their economic remedies. They have all formally endorsed, with varying degrees of enthusiasm, the economic policies put out by the European Commission in the form of its White Paper on growth, competitiveness and unemployment. Therefore they are committed to deflationary policies. There was a time when political controversy was respectable. You could actually talk and argue about the things in which you believed. Apparently, one is now so terrified of what the press will say if one makes any definite policy statements that one clouds one's policies in a sea of ambiguities that are meaningless to everyone. We should get out of that. Surely we know one another well enough in this place and in another place to say exactly what we mean and what we believe in rather than hedge everything under the 11th Commandment of "Thou shall not commit thyself", which is what is happening at the present time. That is why the British people are becoming a little restive.

Moreover, unfortunately they are fearful. They are fearful of unemployment, they are fearful about their security, they are fearful about their old age and they are fearful about the effects of crime. There is fear in the land. If we acted to abolish or to try to alleviate fear, if occasionally by a display of the utmost good humour or at any rate a sense of humour, it would help. We have not done that. In the past 20 years we have gone progressively into saying "We have nowhere else to go. Under which wing can we go? With whom can we associate?", rather than enunciating our own standpoints and our own culture subject to our own arguments and our own disputes.

I am very optimistic that this will eventually happen and that even the noble Lord, Lord Cockfield, and myself may occasionally be able to have a pleasant joust across the Chamber with the utmost good humour. That is what has to be done. At the moment the parties, when

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they are not snarling at each other like little boys, are hiding behind a lot of ambiguities for which the public do not care.

At any rate I am very optimistic about it all. I can see a time coming when all these constraints will depart, when we can all say exactly what we mean and argue with one another with the utmost good humour; but above all apply ourselves to the greatest task of all--of seeing that unemployment never stalks this land again.

11.58 a.m.

Lord Ezra: My Lords, we have had a clear statement from the noble Lord, Lord Mackay, on the Budget for which we are very grateful. It was a subdued statement, as the noble Lord, Lord Bruce of Donington, said, but no doubt the noble Lord, Lord Mackay, will make up for that when he replies to the debate. We have also had a vigorous and optimistic statement from the noble Lord, Lord Bruce of Donington, in which he took quite a sideswipe at those of his colleagues who are economists. We shall have to see how that is responded to later.

For my part I should like to examine some of the underlying assumptions behind the measures contained in the Finance Bill and in so doing it may be necessary to go over some of the ground which we covered in the debate introduced by the noble Lord, Lord Eatwell, on 20th March on economic strategy. That cannot be avoided, but at least we can update some of our views.

Before passing to that I would like to make specific reference to the landfill tax to which the noble Lord, Lord Mackay, referred. I am among those who support the thrust and objective of this tax. However, it has been brought to my notice that it is, like all new measures of taxation, bringing in its train some anomalies and difficulties. One of the major difficulties is the great increase in costs that it will impose on local authorities. Therefore, it seems desirable that some way of mitigating that, during the period when other ways of disposing of waste can be developed, should be seriously considered. I have no doubt that the Government will be doing that. Also, a number of specialised enterprises which have developed ways of disposing of the inevitable waste from their processes over the years, will be particularly hard hit and they will be unable to do much about it. I know that representations in these cases have also been made.

I turn to the underlying assumptions. We need to consider these carefully not only as justification for the measures taken, but more significantly in relation to the future conduct of economic affairs and future budgets. I would like to indicate one or two of the basic assumptions in order to examine how robust they are. We have talked about estimates of growth in the economy on a number of occasions and we know that the Chancellor indicated his firm view in the Budget Statement that growth this year will be at 3 per cent., but so far it is much nearer 2 per cent. If it is to achieve 3 per cent. there will need to be a very substantial increase in the final stages of the year, which can only come from a great increase in domestic consumption, which itself can contain risks of overheating. We have

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been through that before. The general consensus among economists--if I dare mention that name--is that growth will be somewhere between 2 per cent. and 2.5 per cent. for the year as a whole. It will be interesting to know whether that is now the Government's revised view and what impact that will have on future economic policies.

The reduction in the rate of inflation has been a great achievement. It has been maintained at a much lower level than in the recent past and let us hope that will continue. But let us not become too euphoric about it. The level of inflation in the UK is higher than among 12 of the other European countries. Our inflation rate is only lower than the rate for Spain, Italy and Greece. Therefore, that suggests that we have to continue to be very vigilant in this area. We cannot just sit back and assume that all is going well--not, at any rate, by comparison with what others are achieving.

A particular anxiety which has been indicated recently is the way in which monetary growth is developing, particularly M4, which is broad growth in the money supply, including not only money in circulation, but also deposits. For the fifth month running that has exceeded 10 per cent. and that is noticeably above the Government's target. In their early days the Government were much concerned with monetary targets although they have changed their emphasis on this since. Nevertheless, the rate of money supply is of importance. For example, Professor Congdon, who is one of the Chancellor's "wise men", has stated in his most recent broadsheet,


    "If broad money growth remains above 10 per cent."--
which it has been for the last five months,


    "a return to inflation rates of more than 5 per cent. is inevitable, sooner or later".
What are the Government going to do about that area? The amount of money in circulation and on deposit in the United Kingdom is noticeably above that in some other European countries, particularly in Germany, France and, indeed, in Italy. In those countries it is 3 per cent. to 4 per cent. below and therefore they seem to have this matter more under control.

Perhaps one of the most worrying aspects of the underlying assumptions relates to public borrowing. The latest figures on PSBR for the financial year just ended show an overshoot of over £3 billion over the Government's forecast of £29 billion. The Chancellor's comment on that was that he considered that it was within the margin of error. All I can say is that it is a pretty hefty margin of error.

The reason for this shortfall appears to be one-third due to an increase in expenditure, but two-thirds due to reduced tax take. A large measure of the reduced tax take must come from the fact that growth has not been as buoyant as anticipated. But there is also something of a conundrum over VAT returns. I understand that there will be a special inquiry into this. This situation will be exacerbated by what the noble Lord, Lord Bruce, referred to; namely, the recent Court of Appeal judgment disallowing VAT on interest-free finance. It is reported in the press that that may cost the Government

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as much as £5 billion in returned tax: it might be less than that, but we do not know. At any rate, it will be a substantial figure. It will be interesting to know how the Government propose to treat it. For example, will they be making provision for it in the contingency reserve for next year?

We need to consider also the general state of investment because that is one of the recurring themes that we have been talking about in connection with economic policy. If investment shows signs of declining or not increasing, then the impact on future economic prospects can be very serious. What I find particularly disturbing is the report that manufacturing investment in the fourth quarter of last year had been reduced by 5 per cent. The CBI has recently issued a rather pessimistic statement in its quarterly survey about sentiment in the manufacturing sector, which is suffering particularly from reduced export prospects as a result of the weakness in the economies of Europe and elsewhere.

So we really need to look at this matter very seriously and to see what can be done to stimulate investment in the private sector. What is equally worrying is what is happening to investment in the public sector. Table 6.4 on page 120 of the Red Book, shows that it is the Government's intention to reduce public sector capital investment over the next four years from £21.7 billion in 1995-96 to £19.2 billion in 1998-99, which over four years will represent a reduction of 11.5 per cent. That is very serious if at the same time as there is an apparent weakness in private investment, the Government are pursuing a policy of deliberately reducing public investment. Surely, then, our future economic prospects will be jeopardised.

In the same table the Government give their views on how the private finance initiative will operate in that period. They expect it to rise from £0.6 billion in 1995-96 to £2.8 billion in 1998-99. In other words, they are assuming that the reduction in public capital investment will be offset by growth in the private finance initiative.

That assumption has been seriously queried in a recently published report by the Treasury Select Committee of another place issued on 1st April. It doubts whether this degree of substantial growth in the private finance initiative will take place. It asks, first of all, a leading question, which I believe we are all entitled to ask; namely, what is the Government's objective now as regards the private finance initiative? Originally, it was to supplement public investment, but now it appears to be quite definitely to replace it. Is that indeed where we stand? If that is so, the outlook appears to be pretty bleak because, according to the report, there are, for example, substantial delays in the bidding procedures. Furthermore, the cost of bidding is now discouraging many in the private sector from doing so.

The Select Committee considers that a large number of unsuitable projects are being put forward for private investment. There seems to be a directive within government circles that all projects for investment should be put out for private investment whether or not they are suitable. At any rate, that is the view of the

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Select Committee. There is still uncertainty about how risk should be shared between the public and the private sectors, and that is causing problems.

Turning to the health sector, it is proposed that private investment should make a substantial input, but there are still major uncertainties over the constitution of the health service under the present arrangements and about the funding arrangements. It is feared that the risk might ultimately have to be borne by the private investors if trust hospitals get into serious financial difficulties. I should declare an interest because I am involved in some bids in this area and we are concerned about that added risk on top of the normal risks that any business faces.

The conclusion of that very important report, which I hope we shall have an opportunity to debate at greater length on a subsequent occasion, is that the Select Committee regards it as unlikely that the levels of private finance investment estimated by the Government to offset their intended reduction in public sector investment will take place. It would be useful to know what the Minister thinks about that.

In conclusion, there are doubts about some of the basic assumptions underlying the Finance Bill, and that clearly limits the freedom of action with regard to the next Budget. What is particularly worrying is what is happening in investment in both the private and public sectors. Unless we can sort that out, the risks that we run are not only short term, but could be longer term as well.

12.12 p.m.

Lord Boyd-Carpenter: My Lords, this is a very difficult debate in which to take part because it brings together--or clashes together--what in another place is done at separate Sittings. In another place, the Second Reading of the Finance Bill is treated as an occasion for the discussion of the economic policies of the Government and the general way in which they are handling the economy. The later stages, Committee and Report, are devoted on the whole to discussions of particular changes in tax arrangements, such as increases or decreases in tax and whether there should be any such changes, whereas today we are compelled to discuss all those matters in one Sitting--and that on a Friday morning.

I must advise my noble friend the Minister that much as I admire the way in which he opened the debate and much as I respect his technique in handling the House on these matters, this is a very bad way for your Lordships' House to be treated. We ought to have at least one occasion, say, the Second Reading of the Finance Bill, when the general state of the economy and the general trend of measures are discussed. We should then have another separate day or days--perhaps it should be days--when we can discuss the detailed financial proposals, such as proposed changes in tax.

I am well aware of the fact that we in this House cannot vote on changes in tax, but I think that it is unrealistic not to acknowledge that what is said in this House both on the general policy matters to which I have referred and on particular changes in taxation can

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have a considerable impact because your Lordships' House is known to contain a great deal of financial experience, having Members who have been former Chancellors of the Exchequer, Chief Secretaries and economists--both academic economists and economists in practical business. Although we cannot amend the Finance Bill, I believe that if its provisions are firmly and clearly debated in this House we can so influence opinion that it is likely, perhaps at another stage or on another date, that amendments will be put into effect in due course. Therefore, I advise my noble friend that, despite the admirable way in which he opened the debate, this is necessarily a difficult debate and it is not one which will make full use of the experience, knowledge and qualities which noble Lords possess in these matters.

I know that the usual channels have no use for the Finance Bill. That is why it has to be considered at one Sitting, and on a Friday at that. The usual channels take the view that because for some years this House has largely faded out of financial discussions we should just let the Finance Bill go through and save them the trouble. However, I beg my noble friend to try to get into the head of the usual channels--if they have a head--the point that the standing of this House is of very great importance to the future of this House and that unless this House can maintain its reputation--a reputation that can be well supported by its experienced membership--it may well be that in another Parliament steps will be taken by another government of a very adverse nature indeed. However, if this House and its reputation are fortified by intelligent, informed and experienced discussions, any government (however radical they may be) will hesitate to make any radical approach.

Perhaps I may ask my noble friend another question about the procedure being followed. As I understood him, he said that the enormous length of this Bill--again, that enormous length does not help when it has to be discussed in just one Friday Sitting--was designed to tie up so many loose ends that in the future it will be easier to legislate on such matters. Is he telling the House that this Bill is designed so to simplify the procedure of Finance Bills that in future such Bills will be shorter and less complicated because the main structure will be clear and well understood? I thought that he was near to hinting at that, but I am not sure that he went quite so far as to say that that was the intention. However, if my noble friend will allow me to say so, that would be a good explanation of why the Bill is this enormous length.

Again, some explanation is required as to why this House--indeed, both Houses--should have to cope with a Bill of this length unless there is some purpose behind legislating so lengthily. A good purpose would be to tighten the system so that future Finance Bills can be a good deal shorter. Again, that would facilitate fuller discussions, particularly if the usual channels would modify the rather murky flow of their liquid and allow at least two full days for discussion on finance.

I refer to one or two specific matters, the first of which is landfill tax. My noble friend the Minister was full of enthusiasm for it. Not everybody is full of

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enthusiasm for it. I have had a letter from a very distinguished firm that deals with these matters called Brunner Mond. I have no other connection with it. That company says that it will be adversely affected by the landfill tax, which will impose very heavy burdens on it if it is introduced. For some of these companies, in its proposed form the tax will be very damaging. I would be grateful if my noble friend would consider that. If when he comes to wind up he refers to the matter, that will be very helpful.

An even more serious problem is the effect that the withdrawal of tax concessions on saving schemes will have on the provision that a great many people now make for the future education of their children. In view of the high level of school fees, it is the practice for parents to start a savings scheme at an early stage which mounts up so that when the child attains the age of 13 or so and goes to a fee-paying school there is a fund available to help pay the fees. As I understand the Bill, that tax concession is to be removed from these schemes. Therefore, it will be made much more difficult for parents who wish to send their children to fee-paying schools to take financial precautions in advance to ensure that they are able to do so.

I hope that my noble friend the Minister will be able to give some reassurance on the point. It seems odd that any government, particularly a Conservative one, should go out of their way to make the problem of parents who want to send their sons or daughters to fee-paying schools much more difficult by removing a tax concession which has existed for a number of years. I am sure that it is a matter of carelessness rather than malicious intent, but I hope that my noble friend will have a look at the matter and will be prepared to indicate that the Government will give consideration to it. My noble friend the Minister was full of the concessions and improvements to be made but did not spend very much time on those additional areas where tax was to be imposed. These savings arrangements, which have been in operation for a good many years, are a very good example of that. It is a great pity to make those operations more difficult. I hope that my noble friend will be prepared to indicate either that the Government are reconsidering it or that he will go back to his financial colleagues and suggest that in the Budget the tax additions should be removed.

A number of matters of this kind arise interestingly in debating this Bill, but it is extremely difficult under the present system to have specific points discussed. However, the one or two points that I have mentioned are of considerable importance. I do not believe that they are particularly complicated. I believe that the Government, who are very properly reducing tax in a great many areas, ought to look carefully at those areas in which they are withdrawing tax concessions, since when a tax concession is withdrawn it must, in the nature of things, give rise to difficulties to those concerned. In the particular example that I have quoted--parents who desire to send their children to fee-paying schools--it is important that the Government should show sensibility and sensitivity.

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It is good that your Lordships' House has had an opportunity to discuss the Finance Bill, however briefly (and perhaps confusingly). I hope that in future there will be a greater opportunity to do so. Meanwhile, I ask my noble friend the Minister, despite the difficulties that he quite obviously faces, whether he is prepared to answer the various questions put to him as to concessions that may well be made on the Finance Bill. This is the moment to discuss it. With an election pending there is time and opportunity to make a concession or two that may be of great value to the persons concerned and may do something to assist the standing of the Government.

12.26 p.m.

Lord Desai: My Lords, it is always a great pleasure to follow the noble Lord, Lord Boyd-Carpenter, in a debate on the Finance Bill. He is correct and consistent in saying that we do not have enough time to debate the Budget. I tried partially to correct this earlier in the Session when I was lucky to be able to propose a general debate the day after the Budget Statement. It is my hope that such a practice can continue as a normal part of our debates so that, while we may not discuss the Finance Bill, we can discuss the Budget Statement at a fairly early stage. Perhaps the usual channels can look into that.

Another aspect to bear in mind is that the merger of the expenditure and taxation parts of economic policy has reduced the time allowed for discussion of economic affairs. In the days when we had an autumn expenditure Statement and a spring Budget we had two bites at the cherry and two occasions on which to debate it. Now we have only one Budget and one opportunity. When the Finance Bill comes along we have no way of discussing expenditure, unless we choose to do so. We have only the taxation aspects to discuss. The expenditure decisions are there only implicitly and not explicitly. I believe that whoever devised that great unifying scheme has done a disservice. Obviously, the Government have to anticipate tax cuts in November when the elections are held in June. That will not be an easy matter.

I should like to begin by discussing specific taxation, because that is what the Finance Bill is about. Later on, I shall remark upon general issues. I welcome the green taxes. It is good that we put more and more emphasis on taxation both as a matter of revenue raising and as a way of carrying out environmental improvements. Some noble Lords may have seen the calculations of Professor David Pearce of University College London. He has looked at the total social cost of private transport, which is enormous.

To the extent that we can divert people from private to public transport, it is all to the good. If we have to tax vehicles, that would be a good thing. The Minister said that the real cost of vehicle excise tax had fallen. I deplore that. There is no reason for doing that. If anything, the tax should at least be indexed, if not more than indexed, to follow the same principle as the Government have rightly followed with petrol.

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We have had debates in the past about pollution caused by cars. As we know, the bulk of the pollution is caused by a small proportion of the cars on the road. They are mainly four or five year-old cars. When the Government next think about vehicle excise duties, they should consider taxing older cars more heavily. They can do what they like about vintage cars. That is a frivolous problem.

By the same token, I welcome also the landfill taxes. Problems have had to be ironed out, as noble Lords have said. But, in general, if we can direct our taxation away from productive factors (labour and capital) and more towards the consumption of natural resources and despoliation of the environment, the better off we shall all be. That would be welcome.

There are other things to say about this issue. In a sense, what the noble Lord, Lord Boyd-Carpenter, said is one aspect of the matter. We should not worry about high or low taxation. I shall not worry about that. We want to know the overall impact of taxation on, for example, families. In the final analysis, does the Minister know? Let us take two-parent families with children. Does the Budget help them or does it not? That is the type of issue that should be addressed. He may not have the answer immediately, but I would appreciate it if he would write to me on that point.

As the Minister knows, his noble friend Lord Skidelsky has argued that the present taxation system is biased against families. I do not know whether or not that is true. It would be nice to have matters laid out in the Budget Statement. It might say, "Okay, this Budget has the following effects on different types of families (single-parent families, two-parent families, with or without children, the elderly and so on)." I know that at the moment we have the tools to do that. They have been produced by the economists of whom my noble friend Lord Bruce does not approve. It would be good if the Budget document showed what would be its impact on different social groups and social classes. It would also be good to know what would be the impact of the various environmental taxes on, say, the emission of greenhouse gases, or what have you. I should be grateful if the Minister would answer that point in his reply or write to me about it.

I welcome the fact that in the treatment of savings under Clause 73, we are progressing slowly from income tax towards expenditure tax. I should like income tax to be converted into an expenditure tax. That is the only logical and fair way of taxing, because what we want is not to tax income but to tax expenditure. To the extent that we can tax consumption rather than savings, we should have a more growth-oriented policy than previously.

I come now to more contentious items. As the Minister knows, I do not think there is anything such as low taxation or high taxation; there is adequate taxation. One should have enough tax to cover expenditure. We should stop having all these fantasies about real and deep cuts in expenditure, because there are none. They are basically cuts in projections. There has been a growth in irresponsibility in fiscal policy by constantly harping on cutting taxation and lower taxation, especially income taxation.

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We have let the public sector deficit get out of control. I invite the Minister to look at page 45 or page 75 of the Red Book. He will see that the path laid down in the 1994 Budget for a return to a balanced budget has slipped. It had slipped by the time the Red Book came out. It has slipped since. So much so that, according to the Maastricht criteria, we have a 6 per cent. plus ratio of deficit to GDP. There is no way--referendum or no referendum--that the Government responsible for taking this country into the single currency will be able to deliver a 3 per cent. budget deficit without excruciating pain. I am saying this right now: whoever is in charge will have to take drastic action. We have all this fuss about why we are not a tax-cutting party--the Minister's party wants to be a tax-cutting party. I should prefer it to be a fiscally responsible party. That is more important than cutting taxes. We cannot go on with a system whereby every day we promise that the day after tomorrow we shall be prudent, but in the meantime we shall, just this once, have a little extra bite at the cherry. We cannot go on in that way. That has been going on for far too long.

We do not have to balance the £50 billion, which we once saw two years ago in the borrowing requirement, but £32 billion is not a small sum of money. If the gross projection is not fulfilled, the projected PSBR for the next year will be higher in money terms and higher in proportionate terms, because the growth projection will not be according to what the Government fantasise. Therefore we shall be once again at 5 per cent. or above in terms of the ratio of deficit to GDP. That is nothing of which to be proud.

We no longer live in Keynesian days when the deficit had good positive effects--multipliers and all that. We live in different times. Deficits are not good. That is shown by the fact that the yield on gilts that the UK Government have to pay is more than 1 percentage point above what the German and American Governments have to pay. That is basically the extent to which our fiscal policies are costing us extra money. I should like a firmer commitment from the Chancellor--I have no hope that he will give it--in the next Budget that he will get hold of the problem and do something about it.

Unlike the noble Lord, Lord Ezra, I do not worry about inflation getting out of control. I am not worried about M4. I have never been a monetarist and never shall be. One of the factors which makes inflation lower has nothing to do with fiscal monetary policy. It has to do with the fact that we are now in a much more global world, and the price of manufactures is falling world-wide, because of the entry of Asian countries into the manufacturing world.

As long as the economy is open to those competitive forces we shall benefit from low inflation. I worry much more about any deviation from openness in the economy in relation to low inflation than about M4 and so forth. The M4 statistics are now so distorted that even Sir Patrick Minford, who was another high priest of monetarism, has stopped believing in M4. Fashions change. However, I believe that the inflation figures, such as they are, are not a cause for concern. I know that the Government are puzzled about the fact that

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manufacturing employment has stayed up while manufacturing output has been flat. That is an interesting problem to which I once offered an answer. I know that the Government carefully read all that I write. They should perhaps reread what I wrote about a month ago. There is an idea that we are switching from exports to domestic goods. That has a bigger effect on employment in manufacturing than on output.

When the Budget was first introduced I said that it was precipitate to have given a tax cut. I maintain that view. I maintain the view that the slippage in PSBR is not accidental and should have been foreseen. However, to the extent that it was not foreseen, I hope that the next Budget will not again rely on cosmetic projections of expenditure and try to run away with tax cuts, but will tackle the problem of the budget deficit. In that respect, future generations will be paying the cost of the present generation's frivolities. I believe that we should take the matter seriously and not politically.

12.40 p.m.

Lord Cockfield: My Lords, like my noble friend Lord Boyd-Carpenter, I welcome the opportunity of debating these matters. The noble Lord, Lord Bruce of Donington, taxed my noble friend Lord Mackay of Ardbrecknish with delivering a subdued speech. I have never heard the noble Lord, Lord Bruce of Donington, himself deliver a subdued speech, at least not in the 17 years which have expired since he took his place on the Benches opposite.

I was a little perturbed that, in listing the important objectives of policy to which the Government are committed, my noble friend on the Front Bench put inflation at the end of the line. He repeated that in his final paragraph. I am sure that that was merely to accommodate the elegance of what he was saying rather than that it had any psychological importance. Nevertheless, it is a matter of considerable importance, and it is inflation that I propose to discuss.

I wish to begin by referring to an exchange which took place in your Lordships' House on 13th March, following the publication of the minutes of the meeting between the Chancellor of the Exchequer and the Governor of the Bank of England. In trying to be helpful--that is always a mistake, but I shall later explain exactly why I did so--I said to my noble friend:


    "Why is it that every time they agree to reduce the rate of interest, the rate of interest on the Government's own borrowings goes up? Why was it when on the last occasion the rate of interest was reduced to 6 per cent. the yield on the Government's last issue of gilts promptly went up to 8.3 per cent.?".
My noble friend Lord Mackay wisely said that he did not know. I always admire a Minister who says that he does not know. Apart from the fact that it is true, it saves the subsequent embarrassment of having to try to produce reasons for something which is wrong.

I am sorry that the noble Lord, Lord Peston, is not in his place. I am sure that the noble Lord, Lord Eatwell, will convey my respects and best wishes to him. However, the noble Lord, Lord Peston, being unencumbered with the experience which comes from holding high office, promptly said:

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    "My Lords, may I help the Minister by telling him the answer?".
I leave out a few words in the middle of his remarks because they were a compliment to me and I am rather choosy about where compliments come from. The noble Lord went on to say:


    "essentially what the market is saying, as was apparent yesterday, is that it expects the Chancellor as soon as possible to reverse those cuts".
At that stage my noble friend on the Front Bench said:


    "Perhaps I should say that the noble Lord [Lord Peston] is right".--[Official Report], 13/3/96; col. 847.]
Unfortunately, my noble friend was wrong in saying that the noble Lord was right because in fact the noble Lord was wrong. The reason why the yield on gilts went up was that the reduction in the rate of interest led the markets to doubt the Chancellor's commitment to his inflation target. Therefore, they had to factor in an additional insurance premium against the risk of the Government living up to their target.

It is most important that we should understand that that is what is happening. Inflation has been the bane of this country for the best part of 50 years, ever since 1945 and until a few years ago when the Government, in particular my right honourable friend Mr. Kenneth Clarke, the Chancellor of the Exchequer, decided that the time had come when something serious must be done about it. Inflation destroys the competitiveness of British industry; it destroys the competitiveness of our exports; it destroys investment; it destroys savings; and it creates great social tensions. We can see that clearly by looking at the history of this country under successive governments. I wish to underline that because, if anything, Labour Governments were worse than Conservative Governments, so they can take no pleasure whatever from anything that I am about to say--


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