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6.56 pm
Mr. Geoffrey Clifton-Brown (Cotswold): This was one of the most over-hyped, over-spun, media-spectacle Budgets that I can remember. Indeed, one is not disappointed by the two opening sentences of the Chancellor's Budget speech. It is a good idea to remind the House that he said:
- "Only once in a generation is the tax system fundamentally reformed. The Budget I bring before the House and the country today begins the task not just of modernising taxation but of modernising the entire tax and benefits system of our country."--[Official Report, 17 March 1998; Vol. 308, c. 1097.]
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The Chancellor gives himself divine status. A previous Chancellor coined the phrase that a Budget celebrated on the day is often regretted at leisure. History will judge today's Chancellor by whether he lives up to the very high expectations that he set himself in his opening remarks.
Added to the fiscal tightening in the previous Budget, through the windfall tax and advance corporation tax credits, fiscal tightening amounts this year to £11.8 billion and next year to £9.9 billion. The question is whether that will be sufficient to avoid having to increase interest rates at the next Monetary Policy Committee, bearing in mind the effect that that will have on the value of the pound.
Part of the macro-economic situation is the City's verdict on the Budget. What happened? The pound soared to a nine-year high. The group chief economist of the Hongkong and Shanghai Banking Corporation, Roger Bootle, said:
We delivered one of the brightest economic situations that this country has seen since the war. We left a golden legacy, in which growth exceeded inflation. It is a bitter disappointment that the rate of growth is falling. The Red Book predictions show it falling from 2.5 per cent. to 2 per cent. this year and to 1.75 per cent. next year, which will be unsatisfactory even if it is achieved. On the day that the Budget was delivered, the retail prices index rose disappointingly from 2.5 per cent. to 2.6 per cent.
How is the Budget to be judged? There are some welcome elements, but most of the welcome measures come with a "but". One could welcome the decrease in corporation tax for large and small companies to 30 per cent. and 20 per cent. respectively, but that has to be considered in the context of the overall burden of taxation on business, which has considerably increased because of the withdrawal of associated tax credit in the previous Budget and, perhaps more importantly, the quarterly filing of corporation tax for large companies. That will place a burden on companies.
The Chancellor made much of trying to introduce a climate in which small businesses would thrive. He said that he was trying to reduce bureaucracy, but, nine months into the Government's term of office, I see no sign of them reducing bureaucracy--quite the contrary. As I said in an intervention on my hon. Friend the Member for Maidenhead (Mrs. May) yesterday, the measures that the Government are accepting from the European Commission, particularly in the social chapter, such as the
decision at the recent meeting to allow works councils for small firms with fewer than 50 employees, will add considerably to the burden on small businesses.
The Budget will increase taxation as a proportion of gross domestic product. That can be seen from chart B2 on page 119 of the Red Book. The prediction is that the overall burden of taxation will be 38 per cent. next year. Given that our major economic rival, Germany, with which we compete directly in many markets, has an overall taxation burden of 39 per cent., the situation is serious. The prediction is based on some optimistic assumptions for levels of growth. If those predictions are not sustained, the level of taxation is likely to go over the magic figure of 40 per cent.
The level of Government expenditure as a proportion of GDP is also mentioned in the Red Book. That figure is also likely to go over the magic figure of 40 per cent. in the near future. With our major rivals such as the United States, Japan and Korea all having a ratio well below 40 per cent., it is bizarre that a Government who claim to be sticking to the Conservative expenditure plans are not doing so, as a detailed examination of the Red Book shows.
One of the disappointments is that the Government cannot control social security expenditure, contrary to what they are proclaiming publicly. Table B18 on page 128 shows that the social security budget is likely to rise by £4 billion over the next two years. The Government are predicting that they will not be able to stick to the expenditure plans.
I have already said that the Budget has some welcome measures, but there is always a "but". One could welcome the changes to employers' national insurance contributions. However, the overall rate of national insurance contribution for employers is rising to 12.2 per cent., placing a considerable burden on companies, largely in the high-tech and financial sector, that are the backbone of our economy and are helping our balance of payments. They will be hit by the measure.
National insurance is an odious tax. It would be more intellectually honest to abolish it and put the burden on income tax. That would be a properly progressive tax, with those who earned more paying more of their share of tax, instead of having a vastly complicated tax that takes up a lot of time for accountants and the Contributions Agency. All that could be abolished if the system were simplified. I welcome the Chancellor's decision to merge the Contributions Agency with the Inland Revenue. I also welcome the measures to ask the Inland Revenue to help new firms setting up payroll tax. Those are two positive measures.
The Chancellor largely got away with his Budget last night, and the media were on the whole satisfied with it, because he had hyped in advance that middle England--the middle classes and the opinion formers--would be hit. In the event, they were not--or were they? We might just have to wait for the small print. Those of us who know a little about such matters can already divine some of the measures that will hit the middle classes.
One might welcome the reduction of capital gains tax from 40 per cent. to 24 per cent. for assets that are held for 10 years, but let us think about that. If inflation is 2 per cent., over 10 years the asset will depreciate by 20 per cent. If, as is more likely, the rate of inflation is over 4 per cent., the asset will depreciate by 40 per cent.
In other words, the gain caused by inflation will be more than the reduction of tax that the Chancellor is making. By not allowing indexation of gains, we are going back to the bad old days of the high-inflation Governments of the 1970s, which taxed inflation on gains. That is unfair and unsatisfactory. I hope that, by the time the Finance Bill is published, the Government will have had a re-think.
Another disappointment is that, as the Red Book shows, the savings ratio has declined sharply in the past year--by about 1 per cent. It is predicted to decline again in the coming year. Is that surprising, when a retrospective tax was announced to put a lifetime ceiling on the new individual savings accounts and abolish PEPs and TESSAs? What are small savers to think when they might be taxed later? The Government are breaking faith with small savers.
It is a tribute to my right hon. Friends the Members for Hitchin and Harpenden (Mr. Lilley) and for Richmond, Yorks (Mr. Hague) and all my hon. Friends, who have conducted a vociferous campaign, based on huge numbers of letters, that the Government have been persuaded that a lifetime limit of £50,000 on the new ISAs is discriminatory, particularly against the young, and unworkable. The Government have listened to the savings industry as well. I welcome that very much.
I should like to examine one or two of the largely welcome social measures in the Budget in a little detail. The working families tax credit suffers from a number of defects. The Womens Budget Group, an informal think tank of economists, social policy experts and women's organisations, believes that the replacement of family credit with the working families tax credit will lead to women and their children losing. Because the man is usually the breadwinner, he will get the tax credit, rather than it going to the woman.
The same would apply to taxing child benefit. It is often the low-earning or non-taxpaying wife who obtains the child benefit. Taxation would be calculated on the man's marginal rate. She would suffer. We welcome the increase in child benefit, but we regret that those on even basic rates of tax will suffer.
I wish to comment on the increase in petrol duty. The House of Commons estimates that the Chancellor has raised tax revenue by £1 billion this year, on top of the £695 million he raised in last year's Budget. This is a savage rise, which particularly hurts those people in rural constituencies who depend on the car for a lifeline.
People in my constituency have to use the car to get to the post office to get their benefit, to go to the doctor's surgery, and to do their basic shopping. It is all very well the Government saying that the problem is due to the previous Government's deregulation of the bus system, but there will never be a bus system in a rural area that is convenient for every single person--young, middle-aged and old. That is unrealistic. Those in rural areas need a car, and they are clobbered every time in the name of a so-called environmentally friendly tax.
There are many other more satisfactory ways of producing a green Budget. One is to reduce VAT on insulation materials. This is a so-called welcome benefit,
but it is miserly because it is applied only to Government schemes. Why does it not apply across the spectrum? The Chancellor should talk to our European Community officials in Brussels to see if we can get a derogation to apply the benefit across the spectrum, so that all insulating materials can be free of VAT. In that way, instead of the home energy efficiency scheme insulating 3.5 million homes, it would get to all 10 million homes which need it, and some of the poorest people would benefit.
"It's a considerable disappointment that will put a lot of pressure on the Monetary Policy Committee to raise rates."
So the pound is likely to go still higher. As I predicted in a recent speech on the economy, manufacturing industry is already beginning to go into negative growth. If we are not careful, the economy will go into recession in two or two and a half years.
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