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This is the second Finance Bill of the new Government that your Lordships' House has considered. It continues the process of modernising the British economy with the objective of raising the sustainable rate of long-term growth and ensuring that everyone has a share in rising prosperity.
It implements the Government's second Budget; a budget which will help turn ambition into achievement and which encourages work, promotes enterprise and supports families. And this Finance Bill, as with the Budget, takes an unashamedly long-term view. There are no quick fixes. Instead, this is a radical reform package designed to bring about long-term gain for the country.
Last May, the Government inherited an economy showing all the signs that yet another short-term inflationary boom was in prospect, reflecting the previous Government's failure to heed the advice of the Bank of England and take the necessary action. Inflation was way above target and the public finances were in substantial deficit.
Since coming to power, this Government have set out new long-term economic frameworks for both monetary and fiscal policy and taken immediate and tough decisions to prevent a consumer boom and a return to the stop-go cycles which characterised the economy under the previous government. The decisions that we have made since coming to power will achieve the necessary economic stability to ensure that Britain gets back on track for steady and sustainable growth.
Thirdly, I turn to welfare reform. In order to help sustain growth, we need a highly skilled and trained workforce. We are determined to end the waste of resources when people want to work but face barriers to doing so. We will therefore encourage work by making work pay.
First, I should say a few words about our Comprehensive Spending Review. The public sector will spend over £330 billion this year. That is equivalent to over £5,000 for every man, woman and child in the UK. The CSR has taken a radical root and branch look at how this money is spent to ensure that departments meet the Government's priorities. The Government are investing in reform; investing for the long term.
The new spending plans announced in the Comprehensive Spending Review focus spending on the Government's priorities and root out waste and inefficiency. Over the next three years, there will be £19 billion more for education; over £20 billion more for health; £1.7 billion more to improve public transport; and £4.4 billion more to regenerate our cities and housing.
As I said a few minutes ago, the essential precondition for long-term sustainable growth is economic stability and a commitment to openness and transparency in the management of the economy. That is why over the cycle we are committed to ensuring that the Government meet the golden rule; borrowing to invest, not to fund current spending. And we will make sure that debt is kept at a prudent and stable ratio. Indeed, from now the Government will plan on the basis of reducing debt to below 40 per cent. of GDP.
Clauses 155 to 157 of the Bill implement the Code for Fiscal Stability. The code puts Britain at the forefront of economic policy reform and represents an important step forward in the modernisation of our economic policy framework.
It complements the Government's reforms to the framework for monetary policy by building on that disciplined, transparent and accountable approach, this time in the context of fiscal policy. In the global economy, transparency provides an essential underpinning of a successful economy. And it allows Parliament and the public to scrutinise policy to ensure that it is set in the UK's long-term interests.
As a result of the code, the Government will be required to conduct fiscal policy with regard to a clear set of principles, set down in legislation. Detailed reporting arrangements--such as the requirement to produce an annual economic and fiscal strategy report--and proper accounting standards, including a move towards resource accounting and budgeting, are also integral parts of the code.
The Government will be required to state their fiscal objectives explicitly. And the Bill also establishes a formal role for the National Audit Office in assessing the assumptions and conventions that underpin the projections of the public finances. These changes will ensure that fiscal policy contributes to the economic stability which is necessary for growth and employment to prosper.
I also described how the last Budget was a Budget to encourage work and to make work pay. Measures will be brought before Parliament to implement the working families tax credit which will make work pay. And our reforms to the national insurance system will mean that barriers to work which faced so many people in the past have been removed, encouraging employment. The New Deal will be extended to provide new employment opportunities to the long-term unemployed, partners of the unemployed, the long-term sick and disabled and the disadvantaged communities.
The working families tax credit is a major reform to the tax system. And it is necessary because the labour market has changed almost beyond recognition from that of 20 or 30 years ago. Up and down the country, firms are reporting skill shortages. At the same time, there is a huge pool of unused talent--people who want to work. That is why we are determined to give them the skills and opportunity they need. So the working families tax credit, the reform of the national insurance system, together with our increased investment in education, training and skills, will all begin to ensure that we have the labour market to meet the needs of the 21st century.
The Budget also demonstrates our commitment to fairness. Clause 25 keeps our election promise to hold the basic and top rates of income tax. The married couple's allowance will be restricted to give relief at 10 per cent. in April 1999, which will enable us to channel more support where it is needed most; that is, to families with children. Pensioners who benefit from enhanced allowances will have the value of those
We inherited the situation where one child in three grows up in poverty. And the Budget, together with this Bill, increases support for all families with children to begin to tackle child poverty. So, from April 1999, child benefit for the eldest child goes up by £2.50 a week, and there is an equivalent increase for poorer families. Indeed from November this year, child premium, income support and JSA are increased by an additional £2.50 a week for each family under 11 with the result that families on income support with two children under 11 will be better off by £7 a week. That demonstrates the Government's commitment to target help where it is needed most.
And the new childcare tax credit in the working families tax credit will pay up to 70 per cent. of the cost of childcare, up to a limit of eligible costs of £100 a week for one child or £150 for two or more children.
Side by side with labour market reforms goes the need to promote enterprise which is an essential part of an economic policy. The Bill further reforms the corporation tax regime. Clause 29 reduces the main corporation tax rate from 31 per cent. in 1998 to 30 per cent. next year--the lowest rate ever. And the Bill abolishes advanced corporation tax from 1999. This will simplify the corporation tax regime and encourage investment. From 1999, about 20,000 large companies out of 700,000 in total, will start to pay their corporation tax by quarterly instalments, bringing the UK into line with other major industrial countries. We consulted extensively on these reforms, which have been widely welcomed.
As the Chancellor has said, both the main and small corporation tax rates will be held at the new levels or less for the lifetime of this Parliament. When our reforms are in place, companies will pay around £1.5 billion less in corporation tax each year.
This Bill introduces a capital gains tax taper to reward risk taking, promote enterprise and encourage long-term investment by taxing more favourably gains on assets that have been held for longer periods, particularly gains on business assets. When it is fully in place, it will represent a significant simplification to the tax system. The taper, which is introduced by Clause 121 of the Bill, will produce an effective 10 per cent. rate for business assets held over 10 years.
That is on top of other measures to boost research and development. The Budget introduced a new university challenge fund, a private-public partnership, to provide £50 million in venture capital to help turn good research into good business. And we are looking at other ways of improving our record on R&D.
Clause 84 extends the enhanced first year capital allowances which we introduced last year. First year allowances will be set at 40 per cent. rather than 25 per cent. for spending by small and medium sized businesses during the year to 1st July 1999. More than 99 per cent. of small and medium businesses may
Clause 83 contains the legislation for part of the package of measures which the Chancellor announced on 12th May aimed at creating a new framework of prosperity in Northern Ireland. During the four years starting with 12th May this year, expenditure on machinery or plant incurred by a small or medium-sized business for use in Northern Ireland will be eligible for a 100 per cent. first year capital allowance; in other words such expenditure may be written off for tax purposes in full straightaway.
Encouraging saving is also an essential part of our strategy. This Bill introduces the new individual savings accounts making it easier for people to save, extending the savings habit to more people than ever before. We now have a savings regime that is sustainable and where tax relief is fairly distributed.
We are also committed to protecting the environment. Clause 7 increases road fuel duties in line with our commitment to an annual increase of at least 6 per cent. in real terms, having met the targets agreed at Kyoto. For this, credit too must go to the last government who of course were committed to increasing duties by at least 5 per cent. every year. They will no doubt welcome our continuation of their policy. Clause 16 reduces vehicle excise duty for lorries and buses which meet low emission standards.
We recognise that car ownership is necessary in very many parts of the country. That is why we will be consulting on new measures to reduce vehicle excise duty on smaller and more environmentally friendly cars. The use of cleaner fuels like ultra-low sulphur diesels and road fuel gases are also being encouraged. Vehicle excise duty for lorries and buses which meet a low emission standard will also be reduced under Clause 16. This is a Budget that is looking to the future.
This Bill implements many important parts of the Budget, a Budget that was designed to promote long-term sustainable growth, encourage work, encourage entrepreneurship and increase fairness. I commend the Bill to your Lordships.
Lord Boardman: My Lords, Finance Bills tend to pass through this House rather unnoticed because we cannot either amend or vary them. Therefore, I shall avoid dwelling on any of the details of this Bill, some of which are welcome and some less welcome. But it would be more helpful to confine my remarks in the main to the trends which are apparent in the Chancellor's general strategy.
I give just one example of something which was rather misleading and I am sorry that the noble Lord repeated it just now with regard to corporation tax. In his speech, the Chancellor referred to the fact that companies would pay more than £1.5 billion less in corporation tax each year as a result of the changes he had made. Of course, there were reductions in the corporation tax. However, what he did not refer to at all was payment by quarterly instalments. I am told that the effect of that will be to increase the bill for corporation tax in the future very substantially. Indeed, instead of being a reduction of £1.5 billion, there will be a very substantial increase in corporation tax over the lifetime of this Parliament. That is quite apart from the other taxes which are falling upon corporations. Leaving aside the windfall tax which was forecast well in advance, I am told that some £20 billion in additional taxation will fall on corporations during this Parliament.
There are many other matters that I should like to mention; indeed, the Minister referred to savings. The effect of the Budget will be adverse to savings. The noble Lord did not refer to pensions, although the Chancellor the Exchequer did, but the effect of the Budget will be adverse to them.
There is only one small matter that I should like to refer to; namely, retirement relief. That relief has been abolished, but it was of great benefit to small businessmen in enabling them to retire. Throughout the proceedings in the other place, both in Committee and on the Floor of the House, not a single Labour Member--many of whom must have gone searching for the votes of small businessmen in May of last year--made any protest about the possible effects of the decision on retirement relief falling upon their constituents.
I should like to mention one other matter in the Budget speech--the differentiation between capital and current expenditure. It is a great idea and absolutely right. I am sure that every Chancellor of the Exchequer, and certainly every Chief Secretary, has endeavoured to bring this about during his time in office. But every time he will no doubt have received conflicting advice as to what is capital. The one that I remember is a battleship, but many other examples are given. The Treasury has a portfolio, which I am sure is pulled out and shown to every Chancellor of the Exchequer who suggests such a division--at least I hope that that is so. Of course, in principle, that is absolutely right, but capital and current expenditure is different in government from capital and current expenditure in industry.
My main concern relates to the overall strategy which the Government and the Chancellor of the Exchequer adopted from the word go. The Chancellor is responsible for the economic management of the country. Until last year, he had two vital controls: he had a lever controlling his fiscal policy and a lever controlling his monetary policy. Those two levers enabled him to endeavour to steer the ship of state in the direction in which he believed it should go. Right or wrong, it was not always a success; indeed, I do not claim that it was. However, the Chancellor of the Exchequer then surrendered one of those levers--his monetary policy lever--to the Monetary Policy Committee. He is now powerless to do what I am sure he must want to do, and what many others want him to do, in order to balance the economy, the exchange rate and to deal with our overseas trade.
Many people may refer to the examples of the National Federal Bank and the USA Government on the one hand, and the Bundesbank and the German Government on the other, where independent banks operate in a happy and usually fairly successful manner. I could make many distinctions in that respect, but I shall not detain your Lordships by going through them now. Indeed, evidence submitted to a Select Committee from the former president of the National Federal Bank and from the Bundesbank shows many of the differences which arise between their systems of monetary and fiscal policy and the one now in operation in this country.
Prior to last May, there had not been a Chancellor of the Exchequer who had ever approached his Budget, or thought through the economic policy of the nation, without considering what his monetary and fiscal policy should be. Sometimes it is necessary to go in for a touch of taxation or a reduction in interest rates, and so on. I believe that the Chancellor of the Exchequer has made a great error in that direction. It is sufficient to ask how he can possibly produce a balanced budget when he has no control over his monetary policy.
In the past, the Chancellor of the Exchequer always had guidance and advice from the Governor of the Bank of England. That guidance and advice was no doubt greatly respected and mainly accepted. Of course, if the Governor of the Bank of England disagreed strongly enough, he always had the power to resign from it. However, now we have the position where it is not a matter for the Governor of the Bank of England but one for the Monetary Policy Committee, which is made up of a group of unelected but extremely able men. They are able to decide the monetary policy which I believe
Lord Barnett: My Lords, I shall not follow everything that the noble Lord, Lord Boardman, has said. I am happy to say that we served together at one time. Indeed, he was a member of my committee on the European Central Bank on which we produced a report. I know that the noble Lord did not agree with every single dot and comma of that report, but we were unanimous in the end. We all heard some of the evidence to which he referred from major world bankers. Like the noble Lord, I shall not refer to the Finance Bill in detail because, in this House, we normally talk about its economic consequences.
I should like to point out to my noble friend that not only have I heard what he said today, but I also took note of what he said yesterday. Indeed, at col. 1425 of Hansard, I was delighted to see that he said that he believed the single currency "will" work. I emphasise that for the benefit of my noble friend Lord Bruce of Donington. In replying to my committee on the European Central Bank, the Chancellor of the Exchequer did not exactly say the same. Since the reshuffle, I am pleased that my noble friend is able to be so free with his choice of language and that he agrees that the single currency will work. Of course, that is not directly related to the Finance Bill, but he did say that. I hope that he will not withdraw those remarks when he responds to this debate.
Before I comment on the tax and spending plans, perhaps I may say a few words about monetary policy and about giving the powers, to which the noble Lord, Lord Boardman, referred, to the Monetary Policy Committee. I should stress that I completely disagree with the noble Lord in that respect. I support the Government's policy in giving such powers to that committee. If I may say so, I would rather at least have the benefit of one woman who was better than most of the men on that committee; indeed, I would rather they had the power to decide interest rates and monetary policy on entirely non-political grounds than leave it to Chancellors of the Exchequer. With respect, we all know--indeed, it is quite clear--that the previous Chancellor of the Exchequer should have increased interest rates and taken control of what would happen to inflation long before May 1997. Anyone looking objectively at the situation would be bound to agree with that view. Therefore, I agree with the Government's decision to give the power to the Monetary Policy Committee, provided there is full accountability. I think that is crucial. Your Lordships may not have appreciated that today this House approved the appointment of a Select Committee to look at the work of the Bank of England's Monetary Policy Committee. I hope that will provide the kind of accountability to which I have referred.
In other words, the Government's economic policy comes a bad second to control of inflation. My noble friend Lord Peston and myself moved an amendment to delete the words "and subject to that" to enable the Monetary Policy Committee to consider both inflation and the Government's economic policy. That seems to me the more sensible course, but few people in your Lordships' House or in another place supported that. The fact remains that the legislation is as it is, and I am afraid we are left with the situation that the Government's own economic policy comes a bad second to considering the policy on inflation.
As we have no control over monetary policy, let me turn to fiscal policy where the Government have control, subject, of course, to what is happening in the rest of the world and--I know that many of my noble friends and noble Lords opposite will appreciate this--also to what happens in the European Union, whether we are members or not. I refer to the three-year expenditure plans that we have had recently. If I may say so, the totals are somewhat misleading. That is probably an understatement. I assume that was done quite deliberately by adding the three years together and then adding inflation. At the end of the three years you get quite a big figure. I assume that my right honourable friend the Chancellor did his calculations in that way because the totals look better. They certainly appear to be larger sums of money. Nevertheless in my view the idea of having a three-year policy for expenditure is sensible. However, I am not clear whether cash limits apply. No doubt my noble friend will be able to tell me about that. The words "cash limits" seem to have been lost since I introduced them some 20 years ago. The Barnett formula still exists, but the cash limits seem to have disappeared. If the rate of inflation is higher than has been assumed over the three years, would departmental budgets then be cut in real term figures? I hope that my noble friend can answer that question and that I have made myself clear. If inflation is a little higher, or a lot higher, than the 2.5 per cent. given to the Bank of England--or the 2.25 per cent. that has been assumed--will there be a cut in the real term expenditure of departmental budgets?
The case against the three-year expenditure plans was put succinctly by the noble Lord, Lord Boardman; namely, that we are, as it were, spending before we know what the revenue will be. The logic of that, of course, is that one would never spend anything because one does not know for sure what the revenue will be over the next three years. There has to be an assumption--not guesses--about what the growth of revenue will be over the next three years. My noble friend Lord Desai would have a guess, as would hundreds of other economists. They would not all agree. However, on the whole question of economic growth,
Personally, I would not object if expenditure was a little higher. That may seem an odd statement from a former chief secretary but I never enjoyed having to cut expenditure for all those years because I did not enter public life so to do. I wanted to improve public services. But the pessimistic view advanced by the noble Lord and by many others both inside and outside your Lordships' House, and the pessimistic assumptions on growth, are serious and must be taken seriously. I have to accept it is possible that the growth in the economy will be slower if the inflation target that the Monetary Policy Committee has been given is to be met. I should have thought that most people would accept that there has to be a slowing of the economy if inflation is to come down to a reasonable figure.
I wish to show my noble friend that I have read every detail of his speech yesterday. He said yesterday at col. 1426 of the Official Report that 45 independent forecasters and the Government's forecasters are not miles out of line on this matter. There may be one forecaster here and there who may disagree, but they are not wildly out of line. Even the gloom mongers or "doomsters" are still forecasting that the borrowing requirement will be 1 per cent. of GDP at the end of the three years. That may be slightly worse than the Government's forecast, but it is hardly a disaster. Some 1 per cent. of GDP for borrowing is well below the Maastricht criteria in the European Union, which is 3 per cent.
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