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Lord Graham of Edmonton: Oh!

Lord Cockfield: My Lords, perhaps I may remind the Opposition Chief Whip that in the past Chief Whips never intervened in debates on the ground that they did not know what the debates were supposed to be about. That was a very wise course indeed.

However, the record rate of inflation was scored by a Labour Government. I did not wish to rake up the past in that way but I was provoked into doing so by the sub silentio intervention of the noble Lord opposite. Inflation is the bane and the blight of this country's economy, and that of many other countries too. It is absolutely essential that the Government maintain both their nerve and commitment in that respect.

It is necessary to look at how important those figures are. There are two ways in which one can look at them. One can either say that, with inflation running at its present rate of 2.9 per cent.--however, the Government produce so many different figures that one can always toss a penny and hope that it comes down heads up, in particular if it is a two-headed penny--and a rate on long gilts of 8.2 per cent., one has a real rate of 5.3 per cent. Long term, at least over the past 100 years, the real rate of interest has fluctuated on one side or the other of 3 per cent. Therefore, we in this country are sustaining and bearing

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the burden of a real rate of interest which is at least 50 per cent. higher than the real rate of interest which exists in the economy as a whole. One can look at the matter in various other ways.

Incidentally, I am sorry that the noble Lord, Lord Stoddart of Swindon, is not in the Chamber today. I always welcome the opportunity, which rarely arises, of complimenting him on what he says. He has repeatedly drawn attention to the fact that the real rate of interest in this country is excessive, and indeed it is. It impacts directly in terms of hard cash on the public-sector borrowing requirement. In turn, inflation reacts on all kinds of other expenditure because so many social benefits and other benefits are tied to the rate of inflation. Therefore, it is desperately important that the Government maintain their policy on this matter.

I wish briefly to refer to another matter which is closely linked with inflation and which attracts a great deal of interest. It is the lack of the feelgood factor. Whenever you have a straightforward problem for which there is a very simple explanation, you can always rely on economists to provide very long, intricate and often misleading explanations of what has happened. But the real answer is that inflation is just like any other drug of addiction. When you take a shot, you are on a high. When it wears off, you have an appalling hangover so you take another shot of the drug. You go through that again and again. Each successive time that you have a shot of the drug of addiction, whether it is one of a banned substance or inflation, you go through exactly that cycle.

For example, you can see that in relation to the unemployment figures. Every time you have a shot of inflation, it produces a higher peak of unemployment than was produced the time before. When you decide finally that you must come off it, the withdrawal symptoms are quite horrendous. At present we are seeing the withdrawal symptoms as a result of the determination to eliminate inflation from the body politic. That is exactly what we are seeing. We must live through that. We have had two generations who have become used to the drug of addiction and we must now get them off it. That is another reason why it is important that the Government should adhere to their targets on that front and, indeed, if anything, improve upon them.

Because there is plenty of time, I propose to turn to another point, which is a finance point but not perhaps related directly to the Budget; that is, the meeting of the 14 gentlemen of Verona which took place last night in:

    "The uncertain glory of an April day".
My excuse for mentioning this is that one of the subjects which the finance Ministers discussed is what is to be done about the "ins" and "outs" when there is a single currency.

I very much regret to say that, unfortunately, we put the item on the agenda. But I wish to spend a few moments looking at that. Those of us who believe in a single currency--and according to the press reports,

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13½ finance Ministers at Verona agreed with a single currency--do so because we believe that it is in the interests of both the European Union and our own country. We may be wrong but, nevertheless, that is what we think. If you then see somebody depriving themselves of what we think is a great benefit there to be taken, you do not get critical of them; you do not upbraid them; you do not send for the police. If somebody shoots themselves in their foot, you sympathise with them. That should have been the attitude at Verona, but it was not.

There was discussion of what you should do about what was described as competitive devaluation. I do not know whether any of those gentlemen live in the real world, but, as Mr. Lamont discovered when he had that slight altercation with Mr. George Soros, it is not Mr. Norman Lamont who sets the rate of exchange but Mr. George Soros and the market. It cost Mr. Lamont £1.5 billion--or to be more exact, it cost you and me £1.5 billion, because the taxpayers have to pay that money--in order to bring home that lesson. If you have open markets and no exchange control and freedom of movement of capital, which we have now had in the European Union for a good many years, what governments can do about manipulating the rate of exchange is very limited and transitory. You do not really need to do anything about it other than sympathise with the people who follow mistaken policies.

I wish to take an interesting example of that because it shows how much misunderstanding there is on this matter. Frankly, the general position is that devaluation and a weak currency are a burden and a detriment. A strong currency increases your competitiveness and makes the economy stronger.

While I was mulling over what I should say to your Lordships today, I found a report in the Daily Telegraph for which the headline reads:

    "Strong franc cramping L'Oreal style".
Of course, L'Oreal is a very prominent French company and according to the Daily Telegraph the strong franc was cramping its style. However, I then turned to the Financial Times. Your Lordships should remember that the Financial Times is writing for the people who are putting their money where their mouth is. That is an important distinction. They are not economists but are writing for people in the markets, in the real world, who are dealing with real money. The Financial Times states:

    "L'Oreal produces 11th year of growth".
It refers to the group's 11th year of double-digit growth. If that is the penalty that must be paid for a strong currency, I can think of a large number of companies which could well do with a problem of that kind.

But I make that point simply to reinforce my general argument that a strong economy, despite the fears that seem to have been produced by some of the gentlemen of Verona, and a strong currency, are good and not bad. I hope that the Government's determination on those points remains firm.

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12.58 p.m.

The Earl of Harrowby: My Lords, perhaps I may take up 60 seconds of your Lordships' time to speak in the gap. I apologise because what I have to say is almost certainly out of order, but it is not often that one has a Minister representing the Treasury within hearing range.

The point that I wish to make to your Lordships is that we have the filthiest currency and the filthiest notes in the whole of the developed world. I served for 43 years in one of the clearing banks and I made that point to the authorities. I was told that we could not afford anything better. Two days ago, we had a debate on tourism. I doubt whether the Government have done a cost-effective exercise. It makes an extremely bad impression on tourists. I hope that my noble friend the Minister will be prepared to take up with the Treasury that simple issue.

I conclude by saying how much I agree with every word that my noble friend, Lord Cockfield, said.

12.59 p.m.

Lord Eatwell: My Lords, I begin my remarks by apologising to the House for my late arrival for the debate. I had not anticipated the expedition with which the House dealt with Northern Ireland matters and I apologise to the Minister.

Having heard the attacks on economists from all sides of the House today, I wonder whether I should have turned up at all. However, it was worth turning up because I am sure that the whole House is grateful to the Minister for yet another elegant summary of yet another long and complex Finance Bill. His presentation was, as we have come to expect, clear, concise and gently misleading. He managed to present an image of economic competence and command where this Bill presents mismanagement and confusion. He painted a picture of an economy in rosy-tinted good health whereas the reality is a faltering and distinctly unbalanced recovery. As they say on the stage, "It's the way he tells 'em".

The Finance Bill is not only long, it seems never to have stopped growing. When consideration of the Bill began in another place in January, it was, as was mentioned earlier by my noble friend Lord Bruce, just 480 pages long--already one of the longest Finance Bills in history. During its passage it grew by 13 per cent., the Bill before your Lordships' House now having 462 pages. If the Government were as successful in growing the economy as they are in growing their legislation we might all be better off. That might seem to be a trivial comparison--a "cheap shot" as our American cousins say--but this overgrown Bill and Britain's struggling economy are not unconnected.

The Bill contains some of the most ill-thought out, most muddled, and hence, most potentially damaging financial legislation that has ever been brought before this House. Only a government machine which could have produced the shambles and waste of the poll tax could also have produced this legislation. It is worth examining it closely to see exactly why the Bill has grown to its current size.

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On 26th February, while the Bill was in Committee in another place, the Government introduced 166 amendments which dealt with the taxation regime involved in "loan relationships", set out today in Chapter II of the Bill under Clauses 80 to 110. The amendments were produced at the very last minute, published just the day before they were due to be considered, without any notice and without any briefing notes. The performance of government Ministers in Committee was both embarrassed and embarrassing.

Loan relationships cover a vital area of the financial interconnections between firms and the relationships between firms and banks. The declared aim of this section of the Bill was the simplification of the taxation of profits and gains arising from such interconnections and to close loopholes which encourage abuse. Those are worthy aims. Yet what we have before us today is a chapter which is ill-thought through, conceived in haste and born in chaos.

The same may be said of Chapter V of the Bill, which represents yet another attempt to get self-assessment right. The Minister told us that it was the "last tranche" of legislation on self-assessment. I would advise him not to take a small wager on that matter. Just as last year, the Government are further amending the legislation on self-assessment, even as that legislation has come into effect, 20 days ago. So far as concerns millions of Britain's small businesses, self-employed and professional people, it is doubtful whether there has been a more significant contribution to human misery than is manifest in the Government's handling of the fundamental change in the taxation system. The legislation is a muddle, the rules are arcane, and the responsibilities and penalties for mistakes which apply are imposed on the general public in a manner which is entirely unreasonable and unfair. Not only that, it actually puts taxes up too.

I would be most grateful if the Minister would explain what is the £850 million increase in taxation which is attributed in Table 5b.2 of the Red Book to "self-assessment". Exactly how is that increase in taxation being brought about? As self-assessment is a matter for the self-employed, that must be an extra £850 million of taxation levied on the self-employed and hard-working people of this country. They deserve an explanation. Therefore, on loan relationships and on self-assessment this is the Red Tape Finance Bill.

Yet, there is no reason whatever why either of Chapters 2 and 5 should be in the Finance Bill at all. Both pieces of legislation are entirely to do with the management of taxation and have nothing to do with the actual raising of taxation. Neither actually belong in a Money Bill. Both could have been contained in a tax management Bill which would not be a Money Bill. By placing the legislation in a Money Bill the Government have both placed it under the necessarily restricted timetable of the Finance Bill and have ensured that your Lordships' House had neither the opportunity effectively to debate such measures nor to amend them in Committee. The Minister owes us an explanation as to why that device of preventing the House commenting on the legislation effectively has been used.

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We also need an explanation of what is happening to the Government's finances. As has been said by other noble Lords, the borrowing figures released last Thursday revealed a PSBR in excess of £32 billion, over 10 per cent. up on what was forecast just six months ago. Let us remember that only 18 months ago, in the Budget delivered in November 1994 which set the financial stage for 1995-96, the Government were forecasting a PSBR of just £21 billion. So borrowing is yet another growth area for this Government. For example, can the Minister tell the House exactly how much the national debt has increased since April 1992, the date upon which the present Administration took office?

However, even more interesting than the Government's addiction to debt are the explanations which the Treasury offered for this increase in the PSBR. In the Financial Times of 19th April, the Treasury is reported as admitting that a substantial part of the oversight was due to nearly £3 billion less in tax being collected than had been planned in the Budget. About half the shortfall in corporation and income tax receipts could, the Treasury declares, be explained by forecasting errors and lower than projected economic growth. But the Treasury could not account for the shortfall in VAT receipts; nor did it reveal what it intends to do about the VAT shortfall.

On top of that VAT shortfall, we must now add, as my noble friend Lord Bruce and the noble Lord, Lord Ezra, pointed out, the bill for the refund of VAT which, according to the decision of the Court of Appeal yesterday, has been improperly levied on interest-free loans offered by retailers right back to 1973. The Paymaster General, Mr. David Heathcoat-Amory, is reported as saying that the Court of Appeal's decision could have "implications" for taxpayers. Can the Minister tell us just what those implications might be? More precisely, can the noble Lord tell the House exactly what is the Treasury's estimate of the taxpayers' liability if the decision of the Court of Appeal is upheld by the Judicial Committee of your Lordships' House? Are estimates of a new £5 billion hole blown through the Government's finances accurate? If not, what is the accurate estimate? Further, what do the Government intend to do about the VAT shortfall and the extra VAT levies that they must now pay back?

We are well aware that VAT is the Government's tax of choice. The VAT junkies--the noble Lord, Lord Cockfield, referred to the effects of addiction, and the Government are addicted not only to occasional inflation but also to VAT--can never come across a VAT rate without wanting to put it up. So how will they deal with their extra VAT bill?

It is particularly striking that the PSBR this year is £32 billion. Noble Lords will recall that that is just about the level of the PSBR which was contained in the Red Book of 1992, the Red Book on which the Government fought the 1992 election. We are all well aware that much of the Red Book is an elaborate work of fiction, but it is at least worth reflecting on the fact that, after four solid years of tax increases--increases in income tax, increases in VAT, increases in council taxes, new insurance taxes, new air travel taxes; an accumulation

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of tax burdens which, even after this Budget, has left the typical family £670 a year worse off--after all that extra revenue pouring into the Government's coffers, public borrowing is back exactly where we started.

Why should that be? With the share of taxation in national income higher than it ever was under a Labour Government and set to rise yet further, why should the Government still be piling more and more debt, as my noble friend Lord Desai pointed out, on the backs of future generations? The answer, of course, was contained in the Treasury statements to which I referred earlier: the poorer than expected performance of the economy.

Since the Budget there has been a clear deterioration in the performance of the British economy. That was made abundantly clear in the latest CBI industrial trends figures published on Tuesday; and, indeed, in yesterday's retail sales figures and in today's figures on engineering output. The CBI reports that industrial output is down, that exports are down, that new orders are flat, that 16,000 industrial jobs have been lost in the last quarter, and that 11,000 more jobs are expected to go in the next quarter. On top of that, as your Lordships will be aware, investment fell by 5 per cent. in the last quarter of last year, after a year in which investment rates were running little above the dismal levels of the 1992 recession.

In the face of their persistent inability to secure a decent competitive increase in Britain's share of world trade, and their truly appalling record on investment, the Government fall back on the hope of a consumption boom to try to pull the economy out of recession, hoping that the liquidity produced by building society sell offs and maturing TESSAs will do the job that the Government are apparently incapable of doing.

Now that may happen. My noble friend Lord Desai has suggested that such factors may indeed produce growing demand this year. The noble Lord, Lord Mackay, has quoted on a number of occasions an article to that effect by my noble friend, but he has quoted it in a manner which clearly suggests that he has not read it. Had he done so, he would know that there is a sting in the tail of my noble friend's analysis. My noble friend points out that the only factors which are likely to give a boost to the economy this year are on the side of consumption--not investment or exports, but consumption. It is the familiar Tory road to economic ruin--a consumption boom. So even if there is an upturn this year, it will not be the sort of recovery that Britain needs which provides the secure foundations of competitive investment on which an economic future can be built.

But even that might not happen. Yesterday's numbers for high street sales show a very small increase. But why not? Why is the recovery not occurring? Why has the economic growth this year faltered? Why is investment stagnant and exports down? The CBI survey provides the answer: lack of confidence. It is lack of confidence in this Government's economic policies which lies behind the failure to invest. It is lack of confidence in this Government's economic policies which is leading to a haemorrhage of investment flowing out of Britain.

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The Government boast of the inflow of foreign investments into this country but fail to mention that that inflow is vastly exceeded by the outflow of investment from this country.

It is a lack of confidence among consumers. Consumers know that this Government's employment policy is a policy of insecurity. When you know that the Government are committed to making your job flexible, to reducing your security of employment, then you are naturally reluctant to make large expenditure commitments.

It is lack of confidence which is holding the British economy back--a lack of confidence in a Government who have consistently failed to produce an economic policy which will fit Britain for the challenges of the modern global economy. This Finance Bill is more of the same, entirely inadequate to the task of economic reconstruction which Britain needs.

This Government are a burden on the British economy. Their very presence in office is holding the British economy back. The conclusion is clear to all--one does not need to be an economist. No elaborate analysis is required. Sustained prosperity will not return until this Government go.

1.15 p.m.

Lord Mackay of Ardbrecknish: My Lords, as usual in these matters, we have had an interesting debate. I am grateful to all noble Lords who thanked me for bringing forward the Bill today and for my opening speech in which I explained its provisions.

Perhaps I may begin on an equally pleasant note by saying that I read the Financial Times this morning. I am not sure whether this is true; I am not an entire believer in everything that I read in newspapers. But perhaps I should congratulate the noble Lord, Lord Eatwell. I am told that he is to take over as head of Queen's College, Cambridge, next year. I had better not speak of his economic career or I shall fall foul of the noble Lord, Lord Bruce of Donington. The article tells me that one of his perks is to live in the president's lodge on the banks of the River Cam in buildings dating from 1460. I have said previously to the House that I would not particularly like to have been a student of the noble Lord, Lord Eatwell, if I had read economics (which I did not do). But if the noble Lord wishes to entertain me and to give me a lecture about economics at dinner in the president's lodge on the banks of the River Cam, it might be an invitation that I should be unable to turn down.

However, as I congratulate the noble Lord, I find this fact interesting. This is a promotion for next year. He is looking after his career move next year. That suggests to me that he takes the same view as Members on this side of the House about the results of the next general election. Therefore, I congratulate the noble Lord on his wisdom in looking into his crystal ball. I also congratulate him in all seriousness on his appointment.

The noble Lord, Lord Eatwell, as usual, conjured up as bleak a picture as possible of the British economy. The time which elapsed between his description and that

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of the noble Lord, Lord Bruce of Donington, meant that few noble Lords other than myself--I was taking notes--would relate the two speeches. I do not have to remind the noble Lord, Lord Eatwell, that the noble Lord, Lord Bruce of Donington, does not think much of economists; I believe that that message was received loud and clear by all the economists in your Lordships' House. The noble Lord, Lord Bruce of Donington, suggested that we should cheer up: that we have substantial assets in our country. Perhaps the noble Lord, Lord Eatwell, could take a little advice at least on that score from his noble friend.

I turn now to a number of matters raised by noble Lords. I begin with two points mentioned by the noble Lord, Lord Eatwell, which were not referred to by anyone else, as regards some of the detail in the Finance Bill. The first concerns loan relationships. I freely accept that those are not subjects about which popular television programmes would be made. The noble Lord suggested that we rushed the legislation and did not think it through. This is a major simplification of the part of the corporation tax code dealing with debt issued and held by companies. The reform has been widely welcomed. The clauses in the Bill were subject to wide consultation. They were well received and well supported by all sides in the Commons. Extensive government amendments in the Standing Committee, which the noble Lord criticised, sought to address all the major points made in representations on the detail of the proposal. As amended, I believe that this part of the Bill should not prove to be contentious.

As regards the self-assessment portion of the Bill, I take note of the noble Lord's advice to me not to put wagers on no other legislation being required. I believe that there is a difference between fine tuning and tranches of legislation--if I may slightly cover myself for the future.

The noble Lord referred to the figure of £850 million for 1998-99 in the Red Book. He suggested that it represented a hidden tax rise for the self-employed coming from self-assessment. The figure of £850 million in the Red Book is there mainly to cover the rises in profits which we expect to come between now and 1998-99 to be available for taxation at that time. It is not a measure of an increase that we expect to come from self-assessment but rather from increasing prosperity and success from this portion of business.

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