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Lord Ezra: My Lords, does the noble Lord agree that the prospect of the euro coming in 1999 has acted as a strong pressure point on governments to get their finances in order and that, if there were a prolongation for, say, three years, that pressure would be removed and the likelihood of ever getting back there could be much reduced?
Lord Desai: My Lords, we should not postpone it unconditionally. We should say that a performance of 3 per cent. and below should be maintained for a number of years. Only countries which have maintained a good budget deficit record should be allowed to join. Let us merge the stability pact and the Maastricht conditions in one package and let us have a later start date. Let us postpone it so that the markets are convinced that the deficit numbers shown by European countries are not fudged or faked numbers, as they certainly are in the case of Italy and are likely to be in the case of France and perhaps Germany as well. It will do us no good at all just to say that the conditions have been laid down and that therefore, by some narrow interpretation, we fulfil them and start on 1st January 1999. The freedom not to start should be explored. That is the leadership we should give during our presidency. We should say that having these silly conditions dominating us is no way to run economies.
I do not want to say too much about the Finance Bill itself because that is something we cannot amend. But perhaps I may point out one thing about the effects on pension funds. Perhaps one unintended side-effect will be that the pension funds will be able to switch out of equities into gilts. That might make it easier for governments to borrow money. It may be slightly cheaper to finance government debt than before, which may not be a bad thing at all.
Lord Marsh: My Lords, to follow the logic of that, it will also mean that the yield on gilts is likely to go down and that the returns will be less than they are currently because the equity return will be much higher.
I cannot resist saying something about VAT on domestic fuel. I do not believe that my noble friend will like me for this. I have said for a long time that income elasticity for domestic fuel is 3.5 per cent. People who gain from cuts in the tax on domestic fuel are the rich. The poor have to pay the taxes, and if the poorest are to be relieved of the burden, they should be given an income transfer, but do not reduce taxation because that only benefits people like ourselves and we are the last who should be favoured.
Lord Clark of Kempston: My Lords, I follow the sentiments expressed by the noble and learned Lord, Lord Simon of Glaisdale. Your Lordships' House has a wealth of expertise in finance. This House has no power over money Bills and consequently finance debates here are sparse and infrequent. That is a mistake. Although money Bills cannot be altered by your Lordships the advice that can be given from this House should not be ignored.
We have to look at the background to the Budget. My noble friend Lord Mackay of Ardbrecknish was right when he said that this Government have been extremely fortunate because they have taken over an economy which was booming. Unemployment was going down and inflation was low, and so forth. There is no question that the economy of this country was one of the best in Europe, if not the best. I remind noble Lords that that is very different from the economy that the Conservative Party inherited in 1979. I believe that all economists would agree that at that time the economy was a shambles.
I first came to the other place in 1959. I believe that I have spoken on every Budget and I have served on many finance standing committees. It worries me that this Bill has been guillotined. One cannot possibly guillotine a Budget debate when running an economy. Consequently, there has not been close scrutiny of the Budget by Back-Benchers in the other place. I deplore the steamroller effect of pushing through legislation without the normal close scrutiny by the other place.
I believe that the health tax on elderly people in the Budget is a spiteful tax. For the life of me I cannot see why, if a person does not want to rely on the National Health Service, they cannot be helped to have private health care. That aspect of the Budget will mean extra pressure on our National Health Service.
I turn now to the pension dividend changes. I believe that the Government have not looked at how pension funds work. The actuarial value of pension funds, particularly for the future, is dependent on the fact that there were fiscal incentives for pensions.
If that means that an employer has to put an extra tranche of money into the funds in order to counter the cost of £50 billion over 10 years, although the present members of pension funds may remain members, I am worried about the new employees who might come into a business. It may be that there will be resistance by some employers to admitting new employees into their pension funds.
Another point I want to make concerns the base rate. I believe that successive governments have paid far too much attention to the economic effects of the base rate. We all know that there is a consumer boom at the moment in this country. If I have an overdraft of 100 units and I am paying two points over base rate, which is probably what I would have to pay, I shall be paying 8.5 points per 100 units. The Chancellor has put the rate up by a quarter of 1 per cent., but that is not going to stop me spending money. If I know that, from my other resources, I can service an overdraft of that magnitude, another 0.25 per cent. is not going to mean much to me.
As regards the base rate, mortgages have been hit, and also manufacturers, because of the strength of sterling. It means that we shall suck in imports because of the strength of sterling. People will be encouraged to go abroad for their holidays. I do not object to that at all, but it is all a drain on the balance of payments deficit in this country.
We should have concentrated on the other side of the coin to stop or check the consumer boom. I believe that more emphasis should have been given to spending taxes such as VAT. One has to accept that children's clothing, food, and transport would be affected. But the rest of the VAT catchment area could have achieved what is required. The noble Lord, Lord Desai, said that when we are at the top of the cycle we must have no public sector borrowing. That is easily said, but the only way in which one can stop that is either by reducing government expenditure or increasing taxes. There is no other way. It is axiomatic. I remind your Lordships that that happened under both the last government and the one before that. Indeed, some years ago the noble Lord, Lord Jenkins of Hillhead, managed to do that, as did my noble friend Lord Lawson.
We should pay far more attention to matters other than the blunt instrument of raising interest rates by one quarter of 1 per cent. and then by another one quarter of 1 per cent. because there is no question but that that really squeezes our manufacturers and their exports. If they lose exports the consequence is that there are bound to be lay-offs in the workforce. That is the main danger of sterling being too strong. I hope that in the future the Government will look for a more practical way of containing consumer spending by doing something about the spending taxes.
Lord Barnett: My Lords, I begin by supporting my noble friend Lord Desai in his suggestion that we should revert to our previous practice with regard to such debates. I am sure that my noble friend on the Front Bench will be able to assure me that when we have a longer gap between a March Budget and the end of a Session, we shall be able to have a debate on the Budget as well as a later debate on the Finance Bill.
As this is to be our only debate on the subject, I hope that your Lordships will not mind if I do not deal with the details of the Finance Bill but concentrate instead on the general policy behind it. The Chancellor was right to say--he said it again today in an interview in The Times--that he is concerned about getting the economy right and in balance over the long term. He is right about that, but I fear that he is showing an obsession with concern for the short term. He is concerned about the short-term rate of inflation, the short-term public sector borrowing requirement and the short-term level of interest rates. That is in order to achieve a 2.5 per cent. target for inflation, as he said in his instructions to the Governor of the Bank of England.
In the short term, I would not consider it a disaster if inflation was 2.7 per cent. or even 3 per cent. We have known higher rates over the years. I believe that the economy could live with a rate of 3 per cent. over a short period. I could certainly do so. I believe that in the longer term the Chancellor is right to have a target figure of 2.5 per cent. As he told the Governor in that famous letter from which I shall quote in a moment, the Governor will have to explain a rate which is 1 per cent. higher or lower.
However, as a result of the obsession with the short term, growth will inevitably be lower and the tax take will not be high enough to finance reasonable levels of public expenditure. As I have said previously in your Lordships' House, I believe that to sustain for two years the present level of public expenditure bequeathed by the previous government is to attempt to do too much and is to do too much damage to the public sector. The health service, education and local government are in desperate need of money. There can be little doubt about that, yet we are committed to doing nothing more than was done by the previous government.
What I dislike most of all is that apparently no money can be transferred from one department to another. If one department saves money, that money cannot be used in another department because we are committed to the existing levels of expenditure in each department. Which department will therefore save money? Any department that manages to do so will spend it again pretty quickly, and before 31st March in any given year. We all know that that often happens.
Perhaps I may give an example relating to another public sector body. I have the honour to be the trustee of the Victoria & Albert Museum and chairman of its finance committee. Similar things must happen in other public sector bodies. We have had cuts of £1 million a year for three years. That may seem small to your Lordships, but it is not small to a museum. The museum is now expected to operate at public sector wage levels which are not only very low, but which have been frozen in real terms for a long time. The net result is that many employees--wonderfully decent people--accept those cuts because they fear that the alternative would damage the museum and their own employment prospects. They are not on big salaries now, but they have to live on reducing salary levels in real terms while they see the "fat cats", to use the phrase of my noble and learned friend the Lord Chancellor, doing rather better. Therefore, I am not at all pleased to see levels of public expenditure being maintained and I have to tell the Chancellor and my noble friend on the Front Bench that that is my view.
I turn now to the balance between tax levels, interest rates and the exchange rate which everybody agrees is too high. Even the noble Lord, Lord Mackay of Ardbrecknish, said that it was too high, although he did not tell us how he would reduce it. The Opposition do not have a case because they say that there should not have been a Budget. However, they do not tell us what would have happened to the exchange rate and the economy without the Budget or without the increase in interest rates.
My own view is that having higher taxes and higher borrowing to pay for slightly higher public expenditure in the short term would be right and would not massively increase the rate of inflation or the public sector borrowing requirement. Indeed, it would not be a disaster if the PSBR did not reach zero by the end of the century. All the highly intelligent Ministers and Prime Ministers of the 15 countries which were present for the signing of the Maastricht Treaty, on which incidentally there was no referendum, decided that borrowing 3 per cent. of GDP in any given year would be all right. We will be well within that.
We are told by some--by the CBI, for example--that the Chancellor should talk the rate down. That is a strange request for such an organisation to make. Can anyone imagine the Chancellor getting up and saying, "Ladies and gentlemen, I have to tell you that the pound should be lower". I am sure that that would work immediately. It would have some effect, but I doubt whether it would have the effect that the CBI has in mind, although I am not entirely sure what it does have in mind. Some noble Lords may have been members of
Those who complain about the high level of interest rates and the exchange rate do not have the faith in the Chancellor which the CBI has. They do not believe that he could talk down the exchange rate. Not even the noble Lord, Lord Mackay of Ardbrecknish, could talk down the exchange rate because he would not do anything. As I have said, he would not have had this Budget. The noble Lord has now returned to the Chamber so perhaps I may say to him that he never does better than when he has a terrible case. That has been true today. I always enjoy listening to the noble Lord. He made a great speech earlier, but what worries me is that he never has a serious case to make. That certainly applied today, although this is a serious matter on which we are having a serious debate about something which is very important; namely, the high exchange rate and the high level of interest rates.
The Chancellor said that he does not want either a boom or a recession. Nor do I. I do not know what will happen in the economy in the next year. Various assumptions have been made about what proportion of building society windfalls will be spent. They are called "assumptions", but in non-jargon, they are guesses. No one knows what will happen. I willingly concede that I do not know. However, I would rather risk a slightly higher rate of inflation than the dangers of recession and a reduction in growth of the kind that we are all too likely to have.
I was not always in favour of the idea of the Chancellor giving the Governor of the Bank of England and the Monetary Committee the right to decide interest rates. It was generally applauded when he first did it. I am not sure that everyone applauds it today. One reads in the Queen's Speech what the Government say about that matter:
It appears from that that the Governor and the Monetary Committee should take account generally of the Government's economic policy but that the overriding matter that they must take into consideration is inflation, regardless of any other consequences to the economy. That is quite clear to me given the words "without prejudice to this objective". The letter makes no mention of a Bill to confirm that. If there were to be a Bill I would not be in favour of that kind of qualification. However, the Chancellor also says in the letter to the Governor of the Bank of England:
The case for a Labour Government, new or old, has been well made and accepted by the country, but eventually it must be a government that is rather better than just the Conservative alternative. There is no point in just being better than the Conservative alternative. We have to do something--which is what we are in politics to do. I hope that we are in politics to give help to those who need it, both through the public services and otherwise. To do the kinds of things that I fear are being done will not provide that kind of help.
Lord Cockfield: My Lords, if I agreed with a word that the noble Lord, Lord Barnett, uttered on the question of inflation I would immediately sell all of my conventional gilts and buy index-linked. I have no intention of doing either. I entirely agree with what has been said by the noble and learned Lord, Lord Simon of Glaisdale, and my noble friend Lord Clark of Kempston about the difficulties of and objections to debating the Finance Bill so late in the day.
There are dangers as well. I remind the Government Front Bench of what happened almost 15 years ago when the Labour Party, then in opposition, decided to take the Finance Bill hostage and ambush it as part of an industrial dispute. The trap was sprung at four o'clock in the afternoon of Friday, 24th July. The Motion for Third
I should like to raise the question of consultation on major changes in the tax system. I do not do so in any sense of criticism of the noble Lord, Lord McIntosh of Haringey, who has always answered innumerable Questions and supplementaries with great knowledge, patience and courtesy. Just occasionally one gets the feeling that his direct knowledge has run out and, in the immortal words of Edmund Burke, he relies upon his imagination. I propose to deal with the exchanges that occurred on Monday of this week regarding consultation on tax changes.
My noble friend Lord Dixon-Smith asked whether there had been any consultation over the decision in the Budget to abolish the tax credit for pension funds. The noble Lord, Lord McIntosh, did not mince his words. At col. 8 of the Official Report he said:
Over a very long period of time--certainly as far back as 1920--there have been very detailed consultations on major changes in the tax system. The question therefore is whether what was done in this Budget represents merely a standard sort of budgetary exercise or an important change in the tax system. I rely in evidence on the words of Mr. Gordon Brown in the course of his Budget speech. At col. 306 of the Official Report of the other place he said:
There is no question whatever--I have brought along a large selection of documents to prove it--that in circumstances such as this consultation was not only the right procedure but the one almost invariably followed. In 1982, when a massive consultation document was produced by my right honourable and learned friend Sir Geoffrey Howe, as he then was, the result of the consultation was that nothing should be done. That shows that consultation can sometimes put a government right, although not necessarily justify what a government are doing.
I have great sympathy with the Labour Party over this--I say this sincerely--because it came into office with an immense programme--I am not now trying to criticise the programme--and the appalling problem of trying to carry such a programme through two Houses of Parliament in a limited period of time. It had great problems. I in no way contest that, but I want it put on the record that with major changes of this kind the proper course is consultation.
I turn to another aspect of the subject. The Budget changes have been attacked, and in my opinion rightly attacked, on the ground that they impose an additional tax burden of some £5 billion on pension funds and other institutions. But in fact the changes are worse and more dramatic than that. They represent a further and massive step, undisclosed, towards the double taxation of dividends. For more than 150 years--since income tax was introduced in this country in 1789 by Mr. William Pitt the Younger to finance the war against the French dictator, the Corsican Napoleon--the British system has taxed dividends once and once only. Following the system of the deduction of tax at source, of course the tax is collected first on the company and then passed on to the individual shareholder.
But in 1965 Mr. Harold Wilson's Labour Government changed over to what is most misleadingly called the classical system under which dividends are taxed twice. There is nothing classical about that system. In fact it was imported from the USA which imposed it in 1913 when it introduced its federal income tax. That was over 100 years after a system had been introduced in this country. Under that so-called classical system, dividends are taxed twice. That is, one taxes the company first on the totality of its profit--what it retains itself and the dividend--and then one taxes the dividend a second time.
From the Labour Party point of view, particularly from the point of view of old Labour, that was a wonderful idea. It soaked the rich. Potentially it raised a great deal more money. It allowed the Labour Party to indulge in its traditional pantomime of pretending to run the economy.
When the Conservative Party came back into power in 1970, it dismantled that system and returned to the long-established British system of taxing dividends once and once only. Tragically, at that stage a mistake was
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