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Mr. Clifton-Brown: My hon. Friend makes a serious point. Does he agree that there are considerable dangers in the supermarket selling of ISAs? Customers will be encouraged to invest in ISAs by someone without any financial experience. They could be an unsuitable form of investment for them.
Mr. Loughton: My hon. Friend makes an apposite point. Even if the mechanism is more sophisticated than the potential investor struggling through the checkout queue, good advice may be available at the point of entry, but what guarantees that good advice will prevail thereafter? Who will give best advice, especially to new investors, when it is time to switch out of that supermarket's financial product into that of a rival? There is no guarantee of continuity of best advice. As people in the financial industry know, best advice costs. The proposals take no account of such costs.
I am keen to identify the elusive horde of 6 million. Are they the 6 million crowd that will queue up to explore the internal organs of the millennium dome's androgynous figure? It is a mystery greater than Loch Ness or anything on "The X Files".
For the less well-off, there is no attraction in replacing a capital gains tax allowance of £6,800 with an ISA with no CGT implications. Most such people get nowhere near capital gains like that. The income on a £5,000 portfolio of equities at a yield of 3.2 per cent.--an average market yield currently--would be £128 in net dividends plus a £14 tax credit for the next five years only. That is highly likely to be wiped out by charges alone. Instead, it is likely that most new savers will use ISAs as tax-free bank accounts, to transfer existing cash from non-tax-free bank accounts. They will use them as a short-term savings plan to save for Christmas or summer holidays, and thereby not add a penny of new money to savings--and especially not to long-term savings.
The absence of a bonus credit system or a link to the benefit system means that there are no incentives in the ISA proposals for new savers. It is a lost opportunity. The Paymaster General has failed, although he has considerably redeemed himself by not putting the PEPs and TESSAs system to the torch, as he had proposed. The whole exercise has been a shambles, a lesson in how not to rush into things dogmatically; if it ain't bust, don't fix it. The industry has been left with a more complicated system, and the consumer is left confused and disoriented without even the compensation of the thrill of the promised monthly prize draw, which has now, alas, been dropped.
I am a member of the Environmental Audit Select Committee. When it was set up, it was described by the Deputy Prime Minister as a terrier to snap at the heels of Government, but only last week it turned into a savage rottweiler, with the report that it issued. I am glad that the Financial Secretary is here, because she was dragged
kicking and screaming to give evidence to us and has had to reverse her opinion of us. The Budget's environmental content, contrary to some of the spurious claims made in verbose terms by Labour Members earlier, is purely tinkering, and has already been given the thumbs down by the environmental groups. Their summary was that Brown is going green only at the edges.
The Budget is not what it seems. Of the £500 million extra of public transport money, at least £290 million will be gobbled up to patch up the London underground. The VAT reduction on energy-saving materials applies only to people claiming grants under existing Government efficiency schemes. Again, I am glad that the Financial Secretary is here because, ironically, she led the vote to try to get VAT exemption for all energy-efficiency products. Of course, the Government have not done it; it is not even a halfway house, but is a token measure.
The Financial Secretary to the Treasury (Dawn Primarolo):
I shall return to the subject of energy-saving materials and the campaign against the Conservative Government later, but, as Conservative Members have commented on the fuel escalator, will the hon. Gentleman tell the House whether he supports the recommendation of the Environmental Audit Select Committee that the escalator should be set higher than the Government have set it?
Mr. Loughton:
The Select Committee's report was a joint effort, when many of us made representations, but the report as a whole has been endorsed by all of us on the Committee. However, I am happy to speak on the subject of fuel. As the Royal Automobile Club has pointed out, the Budget has brought in £2.75 billion extra from motorists, which is 14 times the enhanced sum that is to be given to public transport. Motorists pay £30 billion a year in taxes, yet less than a third of that comes back to transport. The Budget was described by one environmental group as not much better than a smog alert.
Nothing in the Budget backs up in any way the speeches made by the Deputy Prime Minister, about the need to move to greater use of brown-field sites for housing development. Rhetoric is one thing, but nothing will happen unless it is backed up by tax incentives for developers to take advantage of that form of land for future house-building requirements. Nothing in yesterday's Budget advanced that policy at all. All that is a long way from the Select Committee's recommendation that environmental taxes should be recycled into incentivising environmental improvements. It is a con: the Government are unashamedly using the environmental concern tag to justify increasing taxes on general consumption.
The real test of the Budget will be the impact on the pound and on interest rates. The hon. Member for Croydon, Central failed to understand that the Budget has caused the continuation of the relentless rise in the value of sterling. It now stands at more than DM3.05, which is a nine-year high; and it is up against the euro and the dollar. The value of sterling is crucifying manufacturing exports: in the three months to November, exports to non-EU countries fell by 1.6 per cent. and imports rose by 3.8 per cent. If that trend continues, it will be absolutely disastrous for this country's manufacturing industry.
The Chancellor displays an attitude of, "Not me, guv--it's not my fault; it's all down to the Bank of England. It is responsible for the sterling rate and for interest
rates--they are nothing to do with me." It is a disgraceful indictment of the Government that the Chancellor is prepared to stand by and do nothing as industry is squeezed by the pound. The Budget also makes interest rate rises far more likely, as several Labour Members mentioned. The gilt market fell heavily after hours last night and fell again this morning. Consumer spending is likely to rise by more than 4 per cent., as the Government's figures showed yesterday.
Mr. David Prior (North Norfolk):
No Chancellor since the war could have come to the Dispatch Box with a better economic background, consisting of the most successful economy in Europe, low inflation, falling unemployment and strong public finances. Judged by the Maastricht criteria, we probably have the only economy in Europe that could have passed without smoke and mirrors. As the Chancellor--perhaps we should now call him "the guardian of the people's money"--said, this is a "once in a generation" opportunity for radical change, and it is against that background that the Budget must be judged.
There are parts of the Budget that I welcome, but the macro-judgment will ultimately overwhelm the micro-parts. If the Chancellor has read the economy wrongly, the resulting recession will overwhelm his policies on trying to get people back to work. I fear that he has it wrong. He seems utterly unaware that manufacturing industry, which employs about 4 million people directly and 8 million indirectly, and which is responsible for two thirds of total exports, has been suffering for several months.
As Graham Mackenzie, the director general of the Engineering Employers Federation, said:
Many companies that have struggled to export over the past year and have taken lower margins on their exports so as to retain markets are now concluding that at DM3-plus to the pound, they will have to review their activities. We shall soon see companies such as British Steel making a final decision on capacity in the UK. British Steel's view is:
Interest rates alone are not a satisfactory way of addressing the problem, and the Chancellor, by failing even to mention that during his Budget statement, has missed an opportunity to tackle it. It is widely accepted that Britain currently has a two-speed economy; why are the Government persisting with a policy that is unnecessarily damaging British manufacturing industry?
The second policy mistake was to tax pensions and savings heavily and put pressure on companies' cash flow through the abolition of ACT. The tax on pensions will cost about £5 billion per annum. Corporate cash flows will be hit to the tune of £20 billion over the lifetime of this Parliament despite the welcome reduction in corporation tax and some alleviation for small and medium companies.
My fear is that we are about to enter an unnecessary recession with rising unemployment, rising imports and falling exports and that, for all the Chancellor's exhortations about ending the stop-go cycle, he is contributing to it. We need a better balance between fiscal and monetary policy to allow a progressive reduction of UK interest rates, which would lead to a more competitive and realistic exchange rate. If we do not do that, export order intake will continue to weaken as it has for more than a year now. Imports will rise and unemployment will stop falling. All that will be compounded by the problems in south-east Asia and stagnant growth in Japan.
I shall now deal with some of the micro-aspects to the Budget. I have already said that I am concerned that unemployment will start to rise at the end of this year. Despite that, I welcome the Chancellor's attempts to remove the poverty trap and to make employment more attractive, but how does that square with the minimum wage and the adoption of the social chapter--two measures which will, over time, push up the cost of employment to employers and counteract the policies to remove the poverty trap?
I am also concerned that those measures--especially the increase in national insurance contributions over £81 a week--will work against skilled higher-paid people. Against a background of tuition fees and loans for student maintenance, it is vital that the labour market provides real incentives for the individual to learn skills through higher education.
I am disappointed that there is no change to business rates. Of all the taxes raised from small businesses, business rates are the most damaging, because they are a fixed charge unrelated to profitability. A reduction in business rates for small companies is long overdue, and I am sad that the Chancellor has not taken the opportunity to alter the rates in this Budget.
I am particularly concerned about rural transport as I represent a rural constituency. Many poor people in the country have no access to public transport and no
reasonable prospect of securing such access. They already find it extremely difficult to run a motor car. The increase in the tax on petrol of 4.4p per litre is a real blow to many of my constituents, who will not view the £50 million rural transport fund, spread over three years, as any solution to their problems. That fund is a triumph of presentation over substance--and it also says something about the Government's obsession with presentation.
The Budget does not mention the most unkind tax hike of all--the increase in council tax bills, especially in rural areas. Council tax has increased by an average of about 8.5 per cent. this year. In many rural areas, including my constituency, it has risen by more than 14 per cent. at a time when services--especially social services and education services--are being cut. The increase in the landfill tax from £7 to £10 per tonne will have another knock-on effect for local government.
What should I say to the pensioner in my constituency who wrote to me last week? He will now pay an extra 4.4p per litre for his petrol, higher council tax and more for a pint of beer. In April, he received an extra £1.96 on his basic pension. He told me not to take any political hogwash from this Government--although he supported them at the last election. After this Budget, it will be difficult to give an answer.
"The key issue for engineering and manufacturing remains the exchange rate."
There is a growing weight of evidence that UK manufacturing companies are now reviewing their investment plans. Jack Smith, the chairman of General Motors said only a week ago:
"sterling's strength has turned the UK into a high-cost economy for inward investments".
The same has recently been stated by Honda.
"The undue emphasis currently placed on UK interest rates to combat inflation is resulting in the UK manufacturing sector--and within it the UK steel industry--bearing the brunt of the anti-inflation medicine . . . yet the manufacturing sector is itself exhibiting few signs of inflationary pressures."
18 Mar 1998 : Column 1358
The problem of the high pound has been aggravated by two policy mistakes by the Government. The first is that interest rates, which have gone up five times since Labour came into office, are too high and the inflation target of 2.5 per cent. is too rigid, failing to take into account the fact that inflation is running at about 0.5 per cent. in the manufacturing sector, as compared with 4.5 per cent. in the service sector. The great risk that, in the process of trying to stamp out that 4.5 per cent., a large part of British industry will be condemned to death. That is exactly what happened in the early part of the 1980s, as Labour Members may remember.
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