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Lord McIntosh of Haringey: My Lords, I am interested that my noble friend refers to the possible

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need for an increase in borrowing. He recognises, of course, that that has been fully taken into account in the figures presented. I note and applaud the difference between him and some Conservative spokesmen who seem to think that in good times you cut taxes and in bad times you cut spending and ultimately get away from government altogether. Although we have not gone into detail about the Budget for every year of the next five years--there would be no fun in that--we take the view that the investment that we propose to make in health and education, in particular, is an investment for the long-term future of our country. That is why we are sticking by the £40 billion of expenditure on health and education over three years. In addition, it is the right time as far as the economy is concerned.

My noble friend is, of course, right about the golden rule. It depends on definitions of "capital" and "current" expenditure. A great deal of progress has been made on that. As an accountant, my noble friend will know that accountants will continue to query such definitions-- I nearly said "distort", but as my noble friend himself said that I do not feel afraid of repeating the word. It is also true that an economic cycle is difficult to identify until you have passed it! The definitions seem to work pretty well and we seem to understand fairly well where we are in this present economic cycle. Therefore, I can resist my noble friend's invitation to spell out the Government's policies in the context of the Armageddon that he put to me as an alternative.

Lord Clark of Kempston: My Lords, does the Minister agree that all independent economists agree that the economy that this Government inherited was very healthy? The budget deficit was reduced by the one-off windfall profits tax. Does the Minister agree that as a country we must remain competitive and that something is looming on the horizon with regard to the withholding tax in Europe? That was tried in the United States and in Japan. The result was that that section of their financial markets moved overseas. If we fall into that trap, our financial market will be penalised. The business will not go to Europe; it will not go to Frankfurt or anywhere like that; it will go to the USA or Bermuda. Can the Minister assure us that the Government and the Chancellor will vigorously resist that sort of thing?

Does the Minister agree that it is essential to encourage saving? I know that he will not agree with what I am about to say. Surely hitting savings in the last Budget to the tune of about £5 billion was a mistake because it penalised thriftiness. In the next Budget, will pensions be affected by changing the fiscal policies?

Finally, on tax harmonisation, as the Minister said, our corporation tax rate is one of the lowest in Europe, but if there is harmonisation, that could mean that corporation tax will rise. Of course, corporation tax has not risen and I congratulate the Government on that. However, other back-door taxes on businesses,

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particularly small businesses, have been devastating. Consequently, I hope that the Government will resist any change in the harmonisation of taxation.

Lord McIntosh of Haringey: My Lords, the noble Lord undermined his first argument by saying that all independent economists agree. The time when all economists do agree will be a time when I believe some of us will take a well-earned retirement. No, for the reasons given in the Statement, we do not agree that it was a golden legacy from the previous government. We had rising inflation, we had continued reductions in investment and we had an explosive economy that had to be dealt with.

As far as concerns competitiveness, I strongly agree with the noble Lord that the latter is absolutely the key. However, if he thinks that withholding tax is the key to achieving that, I believe him to be much mistaken. I recommend the McKinsey Report to him. He should also consider the many more important barriers to competitiveness which were referred to in the Statement in some detail. I believe he will find that to be much more constructive.

The noble Lord is also right to say that it is important for us to encourage saving, especially for pensioners. That is why our emphasis all the time is for a stable and low inflationary economy at the heart of our policies. Finally, as regards tax harmonisation, it would need our agreement to enter into tax harmonisation. However, it is not our intention to do so.

Lord Clinton-Davis: My Lords, there is something which evidently escaped the notice of the noble Lord, Lord Higgins. I have in mind the Government's recognition of the need to give employees a real share in the long-term future of the businesses for which they work, aligning their interests with those of established shareholders.

However, while the steps that my noble friend has announced today are important in terms of the purchase of shares by employees, does my noble friend agree that something additional is required; namely, the need to give an incentive to companies to allocate shares to the workforce by providing a tax break for the companies concerned? That has worked with great success in the United States, especially in some parts of the airline business which were showing signs of real collapse--indeed, the possibility of Chapter 11 operations starting. As a result of employee share option purchase schemes coming into operation, productivity increased, the price of shares increased, the well-being and performance of the companies increased and, indeed, many of those airlines are today, in a very tough world, showing distinct signs of success. Is this not something that we ought to approach with rather more zeal than we have in the past in this country?

Lord McIntosh of Haringey: My Lords, I am grateful for my noble friend's contribution. Of course, the announcements made about employee share ownership are only outline proposals in advance of the Budget itself in which definitive announcements will be made. Indeed, this is the beginning of a consultation

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period on employee share ownership. The very interesting and valuable point that my noble friend made will certainly be taken into account in that consultation.

Lord Waddington: My Lords, reference was made a few moments ago to tax harmonisation. Has not the Government's resistance to tax harmonisation in the European Union been undermined by the Government's support for the policy of the OECD on so-called, "harmful tax competition"? Provided that there is no support for tax evasion, what is the difference between one country winning business from another by being able, through its own prudent policies, to offer a more benign tax regime and a country winning trade from another country by producing more efficiently?

Lord McIntosh of Haringey: My Lords, as was the case when it was last raised, this subject is somewhat wide of the pre-Budget Report. Indeed, I do not propose to say anything more than I have already said. We are not obliged to implement any proposals that may be brought forward under the rules of Article 100. We have not said that we will not enter into negotiations because there are clearly some advantages in doing so. However, we shall not do so if there is going to be serious damage to our financial industries.

Lord Peston: My Lords, this is a remarkable Statement. However, I hope that my noble friend will forgive me if I utter three words of caution. Indeed, having performed so excellently, I hope that my noble friend does not then decide that he would rather be sitting elsewhere. First, unless I misheard my noble friend, he seemed to say that we will have only one year with economic growth below trend; namely, next year. In other words, there will be just a blip. I believe that that is something to which the noble Lord, Lord Taverne, was also drawing to our attention. I very much hope that that is true; but, to say the least, I am astonished. Therefore, I trust that my noble friend will convey to my right honourable friend the fact that we would love to see that outcome but that it looks a little on the optimistic side.

My second point refers to the question of employee share ownership. It sounds very good in theory and I certainly toyed with it in my younger days; indeed, precisely along the lines set out by my right honourable friend the Chancellor of the Exchequer. In theory, it should reduce conflict between employer and employee. However, its difficulty lies, does it not, on the side of risk. If employees put their assets into the same company from which they earn their income, they are actually adding to their risk during the cycle rather than subtracting from it. The point would hold a fortiori if pension funds then put even more into the companies for which they were paying pensions. Therefore, without suggesting that that is a bad idea, it is certainly one that I hope my right honourable friend will approach with the utmost caution.

Thirdly--and, I am afraid, rather acerbically--did I hear correctly that my right honourable friend is proposing that businessmen should go to schools which will tell them how to improve their performance? Does

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that not seem to contrast with the proposition that we have a 40 per cent. productivity gap? As those businessmen are responsible for that productivity gap, would it not be better for them if they stuck to their muttons and let the schools get on with what they know about.


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