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7.4 pm
Mr. Giles Radice (North Durham): The right hon. and learned Member for Rushcliffe (Mr. Clarke) made a characteristically sturdy speech. Indeed, he showed why it was a mistake for the Conservative party not to have elected him as leader. He was a little reticent about his contribution to the overheating of the economy before the last election--I chided him about that before that election--but he certainly showed up the right hon. Member for Wokingham (Mr. Redwood). I give the right hon. Gentleman some advice--the shriller the tone, the less likely he is to be listened to. In the long term, the right hon. Gentleman's knockabout stuff will not do. It may be all right for a couple of years of opposition, but it is not persuasive, and he will have to do better.
I agree with the hon. Member for Gordon (Mr. Bruce) and my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) about a single currency. However, some of my hon. Friends will be glad to hear that I shall not follow that line tonight as I want to concentrate on the Budget.
This is a good Budget, and it deserves the widespread praise that it has been given. To begin with, it has proved that consultation is a good idea. The pre-Budget report and the consultation that followed it improved a couple of measures. First, it made individual savings accounts a more effective system. The Government can no longer be accused of retrospective taxation, as they might have been had they not listened to the consultation. Secondly, the new working families tax credit has answered some of the criticisms of the right hon. and learned Member Rushcliffe precisely because there has been a debate about the issues and the Chancellor has answered most of the questions. That is why it will be an effective system. More generally, it is better for the Budget process to be open and for there to be a system whereby one can discuss policy details before those policies are announced. That is a plus and a good thing for our policy making.
I welcome some of the supply-side measures that the Chancellor introduced. I welcome the fact that he has managed a significant redistribution between the better and the worse-off without clobbering the middle classes, which is what people in some Conservative newspapers feared. I also welcome the fact that he has introduced measures to make work to work and employment pay--the working families tax credit, the reform of the national insurance contribution and the expansion of the new deal--and that he has helped children through the promise to increase child benefit next year and the extra help for younger children in poorer families. Incidentally, and sotto voce, the latter compensates for what happened with lone parent families before Christmas and I also welcome the Budget for that reason.
The Budget also contains extremely useful increases for education and health on top of the increases already announced for 1998-99. At times, the hon. Member for Gordon has been churlish about those increases, because they are a good sight larger than we promised and we shall be doing that in every Budget. The fact that a war chest is being built up at least means that there will be extra resources for health and education in every Budget. The hon. Gentleman should welcome that rather than rubbishing it.
The economy faces an uncertain outlook, hovering uneasily between overheating and recession. There are inflationary signs, a tightening of the labour market, and shortages of skilled workers. The Budget forecasts 3 per cent. inflation during the year. On the other hand, a slowdown in the economy is forecast; it is down by 0.25 per cent. on the pre-Budget forecast. That has been caused by the interest rate hike and budgetary policy but above all by the 25 per cent. rise in sterling. There is also the possible impact of the Asian crisis. It is an uncertain situation. Added to that, we have two economies: a depressed manufacturing economy and the service economy, which is still expanding. An interesting graph in this month's Goldman Sachs report shows that clearly.
How is the Chancellor reacting? He believes in long-term stability, which is a worthy objective, given what has happened in the recent past. We all remember the Lawson boom, which led to the Major-Lamont recession. The right hon. and learned Member for Rushcliffe remembers it well because he had to clear up some of the mess. It is right to want to get rid of stop-go and to turn our back on fine tuning, and I have heard the right hon. and learned Gentleman say that.
I support giving the operation of monetary policy to the Bank of England because, in the end, I do not think that politicians can be trusted. Even the right hon. and learned Member for Rushcliffe could not be trusted in the run-up to the general election. He knows that he should have put up interest rates, but he did not. It would have been done if the Bank of England had been in charge.
The Chancellor has imposed on himself the code for fiscal stability. First, there is the golden rule of borrowing only to fund investment. The second rule is that debt should remain at a sustainable level. Those are sensible rules. The Chancellor has been criticised--we have heard echoes tonight--for not taking enough out of the economy, for not having done enough to help the Monetary Policy Committee. We must examine that. The right hon. Member for Wokingham made that criticism, but he was clearly trying to evade the issue. He attacked the Government for increasing taxation but he also said that the Government had not taken enough out of the economy. That was a weak argument. As the Chancellor has said, there has been a 2 per cent. fiscal tightening over the past year, the biggest tightening of fiscal stance since Geoffrey Howe's 1981 Budget.
Part of that is the tightening that comes at the top of the cycle, when more VAT comes in. Interestingly, self-assessment has produced more money for the Treasury. As someone put it euphemistically, people have taken the opportunity to bring their affairs up to date. I do not know what they were doing before, but it is good news for the Treasury. The Chancellor has imposed consumer taxes, such as the two petrol tax increases, the tobacco and alcohol increase, and the two stamp duty increases for houses costing more than £250,000. There is
also the mortgage tax relief reduction announced in July, which takes effect on 1 April, and the reduction of married couples' tax allowance from 15 to 10 per cent., which comes into effect next year.
Added to those taxes, there is a very tight position on spending. The hon. Member for Gordon accepted that. We have stuck to Tory spending plans in a way that no one expected us to--no one thought that it was possible. I hope that that means that we shall have a lot to spend in future, but we cannot be accused of having too lax a fiscal stance now. If we had taken the advice of some City columnists and some speakers tonight and put more taxes on the consumer, we could have plunged the economy into recession. The Chancellor was right not to do that.
To some extent, that policy leaves the strain on interest rates and the decisions of the Monetary Policy Committee. I support that idea. We have already rehearsed the difficulties that the committee faces with the economy overheating but also showing signs of going into recession. It is not surprising that that should produce divisions in the new committee. It is good that they are out in the open, so that we can read about them. They are in the inflation report and the minutes that are published six weeks after every meeting. I think that they should be published one week after. The delay is an unnecessary block to our knowledge.
There are three points of view in the debate. One lot argues that priority should be given to the danger of inflation and that interest rates should rise immediately. They are the hawks. Another lot--I think that it comprises only one person--says that the greater danger is tipping the economy into recession and that there should be no rise in interest rates. The third argument is the most difficult to sustain: the committee should give priority to the dangers from inflation but should wait and see. That is wrong because if, according to the inflation report, there are really dangers from inflation, the committee must act now. It will get into the worst of all worlds by waiting and seeing. That would mean only that those who wanted to hold sterling would buy even more and the pound would go higher, which, as everyone agrees, damages manufacturing industry. It may also mean that we would need higher interest rates later. We may have to do more later and so increase the danger of a so-called hard landing. We want to slow down the economy enough to slow inflation, without tipping it into recession. That is the trick.
It may be that, in April, the committee will say that recession is more likely and that inflationary pressures are being damped. However, if it really decides that the dangers lie more on the inflation side, it should put up interest rates and make people understand that interest rates will not rise further. That would be doing a service to the country and the economy.
Mr. David Davis (Haltemprice and Howden):
It is a great pleasure to follow the hon. Member for North Durham (Mr. Radice). If I may return his slightly
The hon. Gentleman made again the much-reiterated point that the Budget was originally billed as a once-in-a-generation, radical, reforming Budget. I believe that it is somewhat less than that. Indeed, given the comments of the hon. Member for Ealing, Acton and Shepherd's Bush (Mr. Soley) in a rather good speech, it will have less long-term impact than, for example, the early Geoffrey Howe Budgets or--I shall ignore his embarrassment--those of my right hon. and learned Friend the Member for Rushcliffe. Not only that, but what long-term impact it has will not necessarily be all good--anything but.
I do not wish to be over-harsh about the Budget, and I recognise that there are some commendable aspects to it, on which I shall speak shortly. I shall focus on employment and, in particular, the central policy proposal in the Budget--picked out by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon)--the combined reform of national insurance, tax rates and benefits in an attempt to improve the incentives to work and to escape poverty.
That reform is not cheap: the first year of its operation will probably cost about £2.8 billion and the cost seems likely to grow thereafter. However, the unemployment trap and the poverty trap are undoubtedly the plague of modern European economies and it must be right to try to eliminate the monstrosity of people losing more as a result of taxes and lost benefit than they get in pay. The Budget attempts to tackle that and, according to the Red Book figures, reduces by 100,000 the number of low-paid families who face the loss of more than 80 per cent. of increases in pay and by a further 400,000 those who lose more than 70 per cent. All that is to the good--at least at face value--but I shall make some criticisms shortly both of how it is structured and of how it is paid for.
I agree that there is great moral and economic force in reducing the marginal economic taxes facing the poor, but my congratulations are limited and should not give much comfort. We should not miss the fact, already mentioned in the debate, that now more than a million families face marginal deduction rates of more than 60 per cent.--in fact, in most cases, 68 per cent. or 69 per cent.--under the new proposals. On the Chancellor's own figures, the policy puts a total of 250,000 more families in the poverty trap than were there before the reforms. In effect, the wage earner in each of those families, when he looks at his overtime pay, his bonus or his pay rise, must say to himself, "£1 for me and my family, £2 for the Government. £1 for me, £2 for the Chancellor."
That high 69 per cent.-plus marginal deduction, that loss of more than two thirds of poor families' increase in income, applied before the Budget reforms to people on gross pay of up to about £250 a week; now, that 69 per cent. marginal deduction rate applies to families with two children and an income of up to £320 a week. Again, those figures come straight from the Red Book. For those families, the depressing prospect of giving the Chancellor two thirds of any pay increase that they achieve will in future apply to families whose breadwinner, on the basis
of a 40-hour week, earns up to £8 an hour, which is more than double any conceivable or plausible minimum wage level.
Put in simple terms, the poverty trap is being made a little less deep, but a great deal wider. More people will fall in and getting out will be a slightly less steep but much longer climb. All those people--more than a million families--still face that prospect under the new proposals. Few things provide a more dismal demonstration of the depressing arithmetic of the dependency culture than that reform. Those high rates of withdrawal are, of course, a disincentive to work and we face them for the foreseeable future under the Government's strategy. The reasons are hard and uncomfortable and are demonstrable by testing the working families tax credit strategy against its numerical limits.
High benefit withdrawal rates arise from two factors: high means-tested levels of benefit for the poor and low differentials between benefit levels and average earnings levels in society at large. Unless there is a massive change in the basis of our taxation, it is reasonable to assume that means-tested benefits to a worker on average earnings are zero; anything more than that creates a ridiculous dependency arrangement. That is true in most western societies--for example, the American earned income tax credit, on which the Government have based their policy, falls to zero at almost exactly the American median earnings. That means that the maximum range of income over which benefit is withdrawn is the difference between the earnings level from which the credit starts to be withdrawn, which the Budget proposes should be £90 a week, and the average wage, which in Britain today is about £370 a week. A family with two children receives £78.50 of working families tax credit. If the taper were extended right up to £370 a week, the net effective withdrawal rate would be 28 per cent. which, when added to tax and national insurance contributions, would give a withdrawal rate of 61 per cent.
What I have described would be hugely expensive, would drag more than half the population into the benefits system and would still have a withdrawal rate of more than 60 per cent. In other words, the laws of arithmetic--I have used nothing else--virtually dictate that, under the system that the Government have designed, the total tax and withdrawal rate for poor people cannot get below 60 per cent.; therefore, the strategy is flawed.
There are possible solutions. One is to allow the differential between average incomes and benefit levels to widen, but that is unlikely to commend itself to the Government. The second theoretical option would be a massive redistribution using higher taxes on the top half of the population to reduce them on the bottom half, but Labour tried that in the 1970s and it did not work. Finally, the Government could attempt to reduce underlying income tax rates in general by transferring the tax burden to indirect taxes, but they clearly do not intend to do that, as the Red Book shows the percentage of gross domestic product being taken in income tax climbing from 9.5 to 11 per cent. by 2002--by far the biggest proportion of the increasing tax burden is to be raised in that way.
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